Solar forecast: cloudy, with a chance of big upsides

Solar forecast: cloudy, with a chance of big upsides

SunPower (SPWR) spooked analysts this month by warning that it would make a loss in both 2016 and 2017, sending the once-favored stock plunging to $10.31, about 75 percent below its 2014 high, and having a knock-on impact on solar stocks including Canadian Solar (CSIQ) and First Solar (FSLR). Entelligent spoke exclusively with Ben Kallo, a senior clean-tech analyst with Robert W. Baird & Co., to ask how much trouble the U.S. solar industry is in, and whether there are still promising plays for clean-tech investors. 

The solar industry seems to be facing some headwinds. Should we be worried? 

There are two different factors. One is a fundamental market problem, and I do think we can call it a problem now, after SunPower revised their guidance down. There are issues with the supply and demand equation, and everyone’s trying to figure out how big those issues are. And the other is the backdrop from a sentiment standpoint, which is obviously very negative. SunEdison’s bankruptcy (SUNEQ) was a black eye, and with SunPower and SolarCity (SCTY) also stumbling, there’s now a backdrop where public-market investors don’t want to put their toes in the water. 

The sentiment isn’t as bad as I’ve seen it — my phone is still ringing — but it’s pretty bad. There are still investors out there who were hurt on SunEdison, and it’ll take those people a bit longer to come back to the sector. Still, I tend to be on the more optimistic side — I’ve been covering the sector for 10 years, and every year we’ve seen the demand increase. If I’m right, and that continues, it’ll likely come from a pickup in demand in the rest of the world. It doesn’t mean everything will be peachy next year, but many people hear the word “oversupply” and their minds go back to 2009 or 2010. I don’t think it’ll be that bad — there’s access to capital now, and there’s a very different picture, especially in China, than there was in those days. 

So the fundamental picture is better than people think — the question is what it’ll take to switch the sentiment around. The election in November might do that — a lot of people aren’t baking that in yet. Or we might see a country come out of left field with new regulations that boost demand and help turn things around. 

You mentioned SunPower — did their downgrade take you by surprise? 

I was completely wrong on that stock. Part of the problem is SunPower didn’t foreshadow this happening. We’d been bearish on First Solar after they suggested things weren’t going to be as good for them next year as they were this year, but SunPower had numbers out projecting a flat year — to guide down as significantly as they did, when we hadn’t heard a hint of that, caught even the most negative analysts by surprise. A lot of people were short because they thought their the numbers were too high, but I don’t think anyone thought they’d revise down so soon. 

To what extent are the sector’s problems policy-driven? 

I’d say that there’s a degree to which less regulation is better — the industry fought very hard for the tax credit extension, and I think that overall it’s good that it was renewed, but the credit did create a situation in which you had something other than market forces shaping the sector. We’re seeing less of the consolidation that should occur, and that needs to occur for the long-term survival of the industry. It also risks leaving a bad taste in the mouths of investors who view the space as being too subsidy-dependent. 

Where are the bright spots? 

My opinion is that First Solar is the best stock right now in the group. It can’t go up until after they get their guidance out of the way, but right now everyone’s gone too negative on next year, so I’m expecting the stock to move higher on the guidance. I’m expecting next year to be a trough year, then things to look up going into 2018 — they look like good value if you look at cash on the balance sheet. So that’s my favorite play, but it’s going to take time, and there might be more pain before the reward.

The contrarian look would be the rooftop players — I don’t formally cover them, but you’re starting to get some investors go back and poke around at SunRun (RUN) or Vivent. It’s a contrarian play and call, but I think it’s an interesting space. If you think we’re in a world of major oversupply, those companies should benefit from price pressure on the panel side. 

What do you make of the Tesla-SolarCity union? 

It’s a good long-term deal, but people are still trying to figure out the synergies behind it, some of which could take three to five years to come into focus. I think the deal will likely go through, but it does look like they’ll have to return to market for more capital. I don’t know the timing of that, and I’m not sure they do either yet — they’ll be opportunistic, and I’d expect them to try to raise between $1 billion and $1.5 billion. 

Do you think we’ll see more consolidation or vertical integration in the space? 

We’ll definitely see more consolidation across the space — maybe nothing as unique as the deal between Tesla (TSLA) and SolarCity, but some big industrial companies will enter the space. Total (TOT) already bit off a piece of SunPower, and it wouldn’t surprise me if big industrial megacap companies like Siemens (SIEGY) or possibly GE (GE) took a similar approach. 

Is now a good time to be a clean-energy investor? 

It’s a very good time if you’re fresh to the space, even though it’s also a dangerous moment given all the headlines we’ve discussed. There are some big opportunities right now for upside, and the consolidation that will occur if the next year is as bad as we think will help the likes of Vivent and SolarCity — the big players will get stronger as they survive this. There are risks, and you have to be prepared for volatility, but for investors with a timeline that goes beyond the next couple of quarters, the opportunities are there. 

Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.

Originally published on August 30, 2016