Stay Away From This Investment

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The solar industry is an industry that is so easy to fall in love with. After all, what could possibly be better than producing electricity out of thin air (or sun..)?

Most people believe that solar companies are a win-win. Customers pay a one-time fee for installation and are able to maintain a monthly paycheck from the solar company, whose panels are installed in their homes. The panel company (usually the solar company) makes profits by selling this electricity to third parties. And most importantly, the environment benefits because less coal is burned in the process of producing this electricity.

So solar companies offer a winning story, right?

The party that stands to lose
Well, not really. Investors in solar companies tend to hold the short end of the proverbial stick. The graph below shows the five-year performance of the shares of a few leading solar companies: First Solar (NASDAQ: FSLR), marked in blue line. SunPower Corporation (NASDAQ: SPWR) which is marked in green. SunTech Power Holdings (NYSE: STP) which is marked in red, and Trina Solar Limited (NYSE: TSL) marked in purple. I compared their performance to the performance of the SPDR S&P 500, in orange.

<img border="0" height="288" src="http://chart.finance.yahoo.com/z?s=FSLR&t=5y&q=l&l=on&z=m&c=SPWR,STP,TSL,%5EGSPC&a=v&p=s&lang=en-US&region=US" width="512" />

I believe that if you take a hard look at this graph, you will experience a moment of inspiration. All of those fantastic solar companies have caused their investors to lose their shirts. These are not just minor losses; they are devastating losses, on the verge of impossible to recoup.

Whether the reason for those losses is the high valuation of IPO prices, the government subsidies of the solar sector, or any other reason is beyond the scope of this article. What is clear, though, is that solar companies do not currently stand a chance in the long term.

The case in hand
The next losing candidate is already on its way. Only a week ago, SolarCity (NASDAQ: SCTY), a provider of clean distributed energy, announced the pricing of its initial public offering of 11,500,000 shares of common stock at a price of $8.00 per share. The company went public on Dec. 13, and its shares have popped by 35%, to settle at current price of $10.73.

There are some flashing red signs on SolarCity's future success:

  1. Profitablity (or the lack thereof): The company was not able to turn a profit in over six years of operation. In fact, although SolarCity has increased its rate of sales substantially, they were still outpaced by the rate of increase in expenses. Take a look at page 43 of the company's prospectus, here. It is often very refreshing to stare the facts right in the eye.
  2. Valuations: The stock has been valued very aggressively. At a price/sales multiple of 7, it stands way before any other rival company in the sector. That includes some other much more profitable companies.
  3. Hype: For some strange reason, investors seem to fall in love with this company. Perhaps it has something to do with its sexy character of business, perhaps it has something to do with the leading underwriters (Goldman and Bank of America), or perhaps it is due simply to its very successful leading investor - Elon Musk, the CEO of Tesla Motors and the chairman of SolarCity. But whatever and whoever caused this storm, the fact is that the company is endorsed by the market. This hype which currently surrounds it can quickly turn to deep hate once business begins to deteriorate -- or, more simply, when insiders begin to sell shares in the open market.

A Fool looks ahead
If history is any indication of the future, you better stay away from the solar industry in general and from Solar City, in particular. Sky-high valuations, a hype-filled environment, and a profound track record of losses place this company on track to evaporate your hard-earned money.


shmulikarpf has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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