, two big players in the solar industry, are both nearing
bankruptcy. As established as solar has become as a viable
source of energy, the sector still looks far from stable from
an investor's standpoint.
In this segment from the
podcast, Chris Hill and David Kretzmann talk about
what it means for the industry that so many big companies in it
are doing so poorly, and how investors can buy into solar
without adding too much risk to their portfolios. Then, they
take a look at how
is working its way into the sector, and what effect its moves
could have on utilities as a whole.
A full transcript follows the video.
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This podcast was recorded on April 6, 2016.
@MarketFoolery is our
handle. From Thabo Hermanus in South Africa, who very
nicely tweeted a story from
titled "Blinded by the Light," and the subtitle is "Two Big
Potential Bankruptcies Cast a Shadow Over the Solar Landscape."
We touched on one of these companies in a recent
episode, and that's SunEdison, and the other is Abengoa,
which is a renewable engineering firm in Spain.
And I'm curious because I know that the solar
power industry is one that you watch.
As an industry, it's had a pretty nice run, I would say,
for the last five to eight, 10 years, in terms of not just
results, but growing acceptance. Certainly some of the
stocks have had good runs. And I think that, for whatever
questions existed about the viability of solar power
before, say, 2005, I think you'd be hard-pressed to find a lot
of people saying, "No, there's no viability." Solar power as a
viable power option, as a viable way to invest, I think those
questions have been answered.
That said, these are two large companies that are on the verge
of completely collapsing. And I'm wondering, when you
look at a story like this, do you look at this and think,
"Well, that's them, that's not the industry as a whole?" Or do
you think part of this story includes a cautionary tale
I think it's worth being cautious here. As we talked about
with Tesla, similar to that story, these
are companies that are burning through cash, and they have
a good amount of debt. Any time you have a scenario
like that, there is higher risk for investors, because
these are companies that are dependent on issuing stock,
they're dependent on borrowing money to finance the
business, and they're plowing through cash at a very rapid
rate. So, SunEdison, as an example, their operating cash
flow last year for the past 12 months, negative $1.4 billion.
Capital expenditures of $3 billion. That shows you,
they're burning almost $4.5 billion in cash each year. They
have a net debt position of nearly $8 billion.
So, just taking a quick look at the balance sheet and the cash
flow statement, you can get a sense for the position a company
is in. SunEdison would not be able to operate their business
without borrowing money. That just, in and of itself, increases
your risk as an investor. So, I think when you're looking at a
very promising and rule-breaking type of industry like solar,
there's a big mass of movement just consumer-wise and
industry-wise. When it comes to renewable energies like solar,
you want to size any investment in your portfolio accordingly,
especially when it's these earlier-stage or
capital-intensive-stage-type companies like SunEdison.
And this goes for even a company like
, which is probably the most widely followed solar
company here at The Fool, as we've seen with
the performance of that stock over the last year, for one,
it's going to be volatile. And when market sentiment changes
for the worse, there isn't a whole lot of a bottom on the
stock, because there's no earnings, there's a huge amount
of debt, no positive cash flow, they're burning through cash as
a business. So, you just have to recognize that these are
riskier companies. Certainly, when you're thinking in terms of
the potential of bankruptcy happening, it's higher with these
kinds of companies. And the share prices will be more volatile.
Of course, it is company to company. SunEdison tends to invest
more in solar farms, so closer to the traditional utility model
of generating electricity, whereas you have companies
and SolarCity, which tend to be focused and
concentrated on rooftop solar. Which, to me,
actually, makes a little bit more sense, just because
you can use existing real estate to produce solar
with the rooftop solar model. You just stick it on
the top of the roof and you're good to go.
And Tesla actually also has a dog in this fight as well,
with the Gigafactory, which we talked about. As these
lithium-ion batteries become more and more affordable
and more and more mass-produced, potentially, it could
even cut out the traditional utilities. You won't even
have to plug into the existing utilities as we know them
today. You could just have your own battery pack with your
house that can store any excess electricity generated by the
SolarCity has mentioned that they think every solar system
that they install, at this point, within the next eight to
10 years, will have a battery pack installed. So, each house
that gets that solar system would have a battery pack. Whether
or not SolarCity is able to last as a business until then
is another question. Whether or not that actually
happens is another one. But that certainly is the
direction that some visionary people in this industry see
the solar industry heading, whether you're talking about Elon
Musk or his cousins, the Rive brothers.
It's a fascinating industry, but definitely try
to tread with caution here. I wouldn't
make investments in solar in an oversized position in
a portfolio. It's going to be a very volatile
industry. But, on the plus side, even if you just
have a small position in some of these companies like
SolarCity, a small position is really all you need. If solar
takes off, or a company like SolarCity takes off in the way
that a lot of us at The Fool expect it to over a period of
10-plus years, a small position is all you need. You don't need
to load up on one of these companies to be rewarded as an
Don't back up the truck on SunEdison. (laughs)
No. Any company that's burning through cash at this
rate... invest a smaller amount.
Will 2016 Be Cloudy for These 2 Solar
originally appeared on Fool.com.
has no position in any stocks mentioned.
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