We're on the cusp of something huge, and Wall Street is just starting to figure it out. The most abundant energy source in the history of man has finally become economically viable and will soon become the most installed new energy source on the planet. You don't have to dig it up the ground, it doesn't give off harmful gases, and it can even generate power from your roof.
What is this magical power source? The sun.
How far we've come
More than a decade ago, Germany decided it was time to make a big bet on solar. The country heavily subsidized the industry in effort to make it economically viable long-term. The bet paid off -- if not for Germany, certainly for the rest of the world.
Today, highly subsidized markets are giving way to unsubsidized (or less subsidized) markets where solar can compete on its own with traditional energy sources. The cost to produce a module has fallen 54% in the past three years, and the cost to produce solar energy is now less than it cost to buy it from the grid in some places. Going green isn't just a political game anymore -- it's economic reality.
You don't believe me?
For solar electricity to be economically viable, it needs to be less costly than existing power. We should compare it with new, peak generation, since that is what it offsets, but the industry is held to a higher standard that requires costs to be less than what you pay to power a light bulb. Is solar cheaper than your existing power?
Today, in the U.S., the average residential electricity bill is for $0.12 per kilowatt hour, and in California the cost is more than $0.15 per kWhr. Based on those costs, solar is very competitive.
SunPowerwon a contract to build a 100-megwatt power plant at a $0.104-per-kWhr rate last year. This year, First Solar signed on for a project in New Mexico that will pay a 5.79-cent-per-kWhr rate, or about 8.5 cents per kWhr after incentives. That's still well below the cost of electricity in the United States.
Where we're going
Now that costs are competitive with the grid, the sky is the limit for solar. Reduction in panel costs have driven the past decade of overall cost cuts, but the next step is to reduce the balance of system costs, including things such as wiring, inverters, permitting, and land. As these costs come down, so will the cost to install solar from residence to utility.
Just how big the market can become in the next decade is anybody's guess, but it will be huge. China plans to have 40 gigawatts installed by 2015, Saudi Arabia is eyeing 100% renewable energy and is starting with a $109 billion investment aimed at installing 40 GW of solar, and the U.S. is likely to be a 10 GW-per-year country by the end of the decade. That's just three countries; imagine what the rest of the world will install.
The next step for panel manufacturers is to return to profitability. We're starting to see steps in that direction from SunPower, and First Solar is already there. When companies return to profit and the industry sheds the dead weight dragging down prices, we'll see an explosion in revenue and profits for the winners, which means rising stock prices. I think there will be at least three 10-baggers from the industry over the next decade. The hard part is picking which companies these winners will be.
Here's the hard part. A handful of companies will emerge from the industry when it's all said and done, but investors can still feel the scars from plunging stock prices in recent years.
My top pick for more than a year now has been SunPower. The company makes the most efficient panels in the industry, and as costs fall, efficiency becomes more important, because it gives you more power in the same space. Second on my list is First Solar, the low-efficiency and low-cost company. First Solar has remained profitable through the hard times, but it is falling behind on efficiency and may soon become a project company only.
Finally, SolarCity is a dominant player in residential and commercial project building, the major growth venue for the industry in the United States. This isn't a cheap stock, but it should have a bright future.
I've laid out some key statistics for solar companies, showing that despite the run solar stocks have been on recently, there is a lot of room to move higher, because these multiples are very low for high-tech companies, particularly in the case of SunPower and First Solar.
Source: Yahoo! Finance.
If there are going to be winners, there will also be losers. Solar stocks all seem to jump and drop in unison, but some are in fact falling behind. Three stocks I would stay away from right now are LDK Solar , Yingli Green Energy, and Suntech Power . These companies are nowhere near profitability, and they owe billions of dollars to state-run Chinese banks. Equity holders will likely be left in the dust by the time the Chinese solar market shakes out.
The year of solar
Solar stocks have been rising all year, but I think it's just the beginning. Financial conditions are improving, more financing options are opening up, and as costs fall, more markets open up to solar. This is the recipe for the big returns investors are hoping for. I've made my bet. Who do you think will win the year in solar?
What will First Solar become in a decade?
First Solar was built as a module manufacturer, but its modules are being overtaken by more efficient alternatives. A decade from now, the company may just be an installer of modules made by others. Is this good for investors, or is the company on life support? Our brand-new report details every must-know side of this stock and comes with updates when breaking news occurs. To get started, just click here now.
The article 2013 Is the Year of Solar originally appeared on Fool.com.
Fool contributor Travis Hoium manages an account that owns shares of SunPower. He also owns shares of SunPower and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, and Long Jan 2015 $15 Calls on SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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