Before You Invest in Solar...

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

Many investors want to invest in companies that affirm their personal moral values. Solar energy makes investors feel good because not only can they make money, but they can also save the planet. But investors need to be aware of one thing before investing in solar: not all solar companies are created equal.

The irrelevant solar investment

Yingli Green Energy (ADR) (NYSE: YGE) is a manufacturer of solar panels. This company's strategy is to just sell solar panels, something it's admittedly good at. One current deal involves 3 gigawatts of panels. That's enough to power up to 3 million homes, or Doc's DeLorean 2.5 times (since it needs 1.21 gigawatts...)

Unfortunately, Yingli has been a consistent loser when it comes to making a profit. In 2012, the company registered a gross profit loss of $59 million, despite revenue of $1.8 billion. To add insult to injury, revenue was also down 22% for the year.

While the aforementioned deal in China's Yunnan province will likely keep Yingli's factories busy for awhile, it's uncertain whether this will even translate into a gross profit, let alone a net profit. Razor thin margins make it very challenging to turn a profit as just a solar-industry manufacturer. 

The risky solar investment

SunEdison (NYSE: SUNE) has been a four-bagger for those who got in last year when it was trading under $2.00. It has pulled back slightly from recent highs, and many investors may wonder if now is the time to get out.

SunEdison is riding the coattails of an interesting phenomena. Celebrated competitor SolarCity (NASDAQ: SCTY) got a huge boost in investor confidence due to the recent achievements of Tesla Motors (NASDAQ: TSLA).

<img alt="" src="http://media.ycharts.com/charts/4e525823e8d7d98c23974de546fbbcac.png" />

TSLA data by YCharts

Even if this is just a general market trend, it doesn't mean there isn't anything good going on with SunEdison. While also a solar manufacturer, the company operates very differently from Yingli. SunEdison has a second business segment that provides residential solar power solutions through what's known as solar leasing.

Solar leasing basically takes care of all the solar power logistics while the consumer gets the benefits of solar power. In exchange, the company gets recurring revenue from a contract. This kind of revenue has many upfront costs, but the revenue benefit continues for years. 

As we've seen with Yingli, it is very difficult to turn a profit as a manufacturer. That's why SunEdison operates the solar business as well. Unfortunately for the company, this segment of the business is faltering with less megawatts delivered last quarter than hoped. Of those that were delivered, many were of lower-grade panels. These panels don't have the profit margin that the higher-end panels have, which also caused the manufacturing segment of SunEdison to not be as profitable as it could have been.

The safer solar investment

SolarCity -- unlike SunEdison -- only operates the solar leasing business. The company rocketed up big time from its IPO at $9 to where it sits now in the high $30's. It operates in 14 states, but as CEO Lyndon Rive said:  "The market is so big, we could meet our growth targets for the next 10 years just focusing on one state." While not profitable yet, growth doesn't seem to be a future issue.

One compelling reason to consider SolarCity is its ability to solve industry problems. Most recently, the company began to explore options of power storage. Under current laws, when rooftop solar output exceeds usage, this excess is sold back to the power grid. This power could be saved, but batteries are typically cost prohibitive and somewhat inefficient. 

But now SolarCity is teaming up with Tesla Motors to experiment with batteries from Tesla's cars. It will test them out at around 100 sites to see how they perform. If all goes well, these batteries could become part of standard installation by 2015. This shows me that SolarCity has been and continues to be a company that seeks answers to industry problems, which will keep it ahead of the pack.

This news is also good for Tesla. The company plans on manufacturing 21,000 cars this year. SolarCity added 7,000 customers in the first quarter alone. As SolarCity continues to ramp up installations, and if Tesla's batteries become part of the package in 2015, Tesla will actually sell more batteries to SolarCity than it installs in its vehicles. This could prove to be a decent revenue source.

Conclusion

I believe that SolarCity is the superior company in the solar industry. I'm only hesitant with the current valuation. It has already quadrupled this year and currently totes a market cap of nearly $3 billion. I'm not sure the market will continue supporting this.

The company expects to achieve positive cash flow in the second quarter, which could send investors into a new frenzy. But given the 2013 installation goal of 250 megawatts, I believe it will be hard to maintain positive cash flows in the latter half of the year. This could cause investors to get impatient. I'm waiting for a more significant pullback before getting in.

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Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . 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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