We continue to believe the solar industry is “uninvestable.” You don’t have to look much further than the write-up in any solar industry constituent’s 16-page report to get our straightforward opinion:
The solar industry is extremely competitive and continually evolving as constituents strive to differentiate themselves to better compete within the broader electric power industry. Significant price reductions (per watt), reduced margins, and drastic market share shifts have become commonplace for participants. Profitability can be negatively impacted from government subsidies and sovereign capital that allow firms to operate unprofitably for extended periods of time. Production overcapacity is another major concern and will likely persist for some time. We think the structure of the solar industry is very poor.
After the close of trading February 9, we were reminded of why we don’t like the group. In its fourth-quarter earnings release, SolarCity (SCTY) came up a little light, missing its internal installation guidance of 280MW-300MW, putting in place 272MW during the period. The company also offered an outlook for the first quarter that came in lower-than-expected, targeting a placement of 180MW, a “higher-than-usual” slowdown.” Management blamed a shutdown of its Nevada operations and a renewed focus on the cash conversion cycle as reasons for the shortfall. Though SolarCity is targeting a nice ramp of installations throughout 2016, it’s hard to overlook the massive losses it expects to put up in the first quarter alone, -$2.55 to -$2.65 (negative).
We’re going to remain on the sidelines for any company focused intensively on solar. SolarCity is trading off 25% at the time of this writing, while peers First Solar (FSLR), Sunrun (RUN), SunEdison (SUNE), SolarEdge (SEDG), SunPower (SPWR), and Canadian Solar (CSIQ) are also under pressure. We just can’t get comfortable with the industry backdrop.