18 August 2010

Solar Power and the Future

Before the crisis, in the days of 2007 when the market was still to make highs, I looked at solar companies. Solar I like for many reasons, but like all cleaner energy technologies it cannot presently compete with the amount of energy one gets from burning the compacted remains of ancient forests, but if it had support behind it, this is even more so now. At the time I felt they seemed overpriced, so I looked at those who were at the forefront of advancing the technology.

The way solar companies were hit by the crisis, suggests to me that what happened was not totally a crash, but what this blog has been calling it, partly a revaluation. One of the ones which interested me at the time was WFR. Let's look at it and see why it might have been overpriced. BTW remember the market computes value different ways. One of the ways is a future projection. This tends to reach its peak at market tops.

However please note the projections about Internet technology in the late 90s seem to have been essentially correct, if not correct on the details (how could they be though). This makes one think about the future performance of solar companies does it not. The other way the market values is a drastic revaluation to present financial data.

It may be this kind of process is necessary to compute real value over time, it is that time decay this blog has noted across markets. In all events a company who can keep its sales up, will be protected in this kind of revaluation.

WFR's revenue was hit in 2009 by the crisis, it was almost halved. Its expenses were not halved, they in fact went up. This put its bottom line into the red. However it kept its COA in the black. What does this suggest. It suggests perhaps the company is functionally strong. This seems to be showing this year. That all important year on year comparison shows its COA and its net change in cash are both now in the black. Its revenue year on year is up and its bottom line is back in the black. All these factors tentatively suggest a recovery within the company and within the economy, to me.

The question to ask about solar, is now that share prices are at lower levels, is where will future revenue come from. Will it accrue to companies making the technology or will it accrue somewhere else, if it does accrue. Look at the difference between FSLR's balance sheet through the crisis and the WFR. It is the question one can ask in retrospect about the tech boom. Where did the projected revenue go in the end, well it went into companies like GOOG and AAPL.

Again a technologies which have found enormous reach. But the point of this is sales is all important, it generates the balance sheet.

The more a company is sales oriented in its product the better placed it is to sell. That is something to think about with Solar technology companies, over the long term. One can make money by having many sales, or from smaller numbers of bigger sales, or a few huge sales (like defense companies).

That is why I believe they were overpriced, their reach has not been defined yet, and it wasn't in 2007. It was a future projection not so much of revenue but of reach, like the tech boom. The crisis forced a more precise look at their reach as revenue faded. The market does not like a lack of clarity, if it accompanied by a drying up of revenue. But what is the possible signs of strength in WFR about ?

Look where its share price is on its long term chart, it is not back in the place it rose from. Look carefully and you will see it is above it, the spike down from the fall was a rejection of that valuation. The question now will it rise or will it slowly trend back down below that spike. It is the question this blog has asked on other occasions. Is that spike a probe for that valuation future or a rejection of that valuation future.

Here we have seen fundamental support for a rejection, despite what the long term chart may be saying, but only time will tell. It could be noted that the chart pattern since the fall looks a lot like that chart pattern in forex before a surge upwards. But as always chart patterns are only clear, after the event. So which companies will remain in the doldrums and which will rise ?

To make the assumption that they will rise one has to ask simply is solar energy something which will generate significant revenue increases into the future. The market thought so in 2007 just at it thought the same about the Internet in 1999 and there is support for this in company data now. But which kind of company will benefit from this ? In tech it seems like those company which can integrate tech and sales and indeed make sales tech, win (FSLR seems to have done this).

But the tech is one assumes not fully developed (part of its reach) thus the more tech focused companies within this industry are still important. The prize is still there for the taking, that may ultimately be the source of the valuations. Of course those companies which sell well, have cash to take over...

(edited 7/24/14 4:31pm)

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