Daniel Englander
SunPower and First Solar: Two Men Enter. One Man Leaves. January 25, 2008 at 12:30 PM
The thin film bug caught on in a big way in 2007. Investors flocked to the sector despite the technology’s low relative conversion efficiency, driven by tight silicon supply, declining production costs, and the promise of covering the world in flexible PV. First Solar, which IPO’ed in November 2006 at $20 a share, was a big winner in the thin film rush. The company flew high all through 2007, hitting $280 a share on the day after Christmas 2007 on the back of a $34 million acquisition of Turner Renewables, more than $6 billion in contracts out to 2012, and a considerable first mover advantage on other thin film companies. Between it’s November 2006 IPO and the Christmas high, the stock had jumped 1300 percent, while the company’s revenue was up around 270 percent.
First Solar hit an intraday low of $150 yesterday tracking a bust cycle in oversold solar stocks. According to the Motley Fool, the company was selling at nearly 50 times sales and 200 times EBITDA, requiring a 50 percent annual growth and a 30 percent operating margin to maintain it’s current valuation. However, with thin film competitors Nanosolar and Sharp bringing in the big guns towards the end of 2007 at the same time as policy-driven markets in the U.S., Germany and Spain began curtailing their solar incentives, First Solar’s stock took an unattractive turn. Tightening cadmium supply likely also played a role in the messiness.
SunPower, a vertically integrated poly producer, took similar hits in the solar bust over the last couple of weeks. The difference is that SunPower is likely to survive as an industry leader while First Solar will get shuffled back into the thin film deck before the end of 2Q 2008. Here’s why….
Sustained growth in SunPower’s business model will rely on declining poly prices, which are expected to come down over the course of the year. The company is fully booked through the first half of 2008, with the second half filling in at 50 percent as of yesterday. Despite relying on the U.S. for 40 percent of its revenue - with another 30 percent coming from the Spanish market - I think declining poly prices will allow SunPower to price cells at competitive levels in the emerging solar markets of Italy, Greece, Portugal and South Korea. The company’s strong vertical supply chain will keep it well sourced with feedstock going into 2010, while competitors are left scrambling to lock in contracts ahead of the expected module demand drop in late 2008. Oversupply a year out from now could play into SunPower’s established market position, especially if the U.S. revamps the investment tax credit at the beginning of the next administration.
First Solar, by way of comparison, will receive strong competition as established poly producers moving into the thin film space in Asia and startups with better technology begin eating away at its market share. Because the supply dynamics are relatively flat compared to those in poly, the true test will be come from technology and scale. Sharp Solar will bring the world’s largest thin film plant online in early 2010, while Nanosolar recently debuted a high current thin film panel that could break the $1/watt price line as their new commercial facility jumps into high gear.
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