How Solar PV is like Ethanol
Tom Konrad, CFA
High levels of competition in the the
solar photovoltaic (PV) industry mean that buy-and-hold investors
should look elsewhere.
In May 2007, I published a
competitive analysis of the corn Ethanol
industry based on Michael Porter’s classic Five Competitive
Forces model. At the time, Ethanol stocks were flying high,
but my conclusion was that “the prospective ethanol investor should be
very
careful about investing in corn ethanol producers at random.” If
anything, I understated the case.
This chart shows three ethanol stocks that have survived since
2007. As survivors, they are among the best performers in the
industry; several others declared bankruptcy.
Corn ethanol is not a great business to be in; it’s too
competitive. If you buy assets at the right price, you can do
well, but it’s all about timing. A passive buy-and-hold strategy
will under-perform the same type of strategy in a less
competitive industry. Companies in less competitive industries
can
maintain higher returns on capital for longer periods.
Solar Manufacturers
It’s not a secret that I’m no fan of investing in solar stocks,
although I understand why enthusiasts
are
seduced by the sector. Unlike corn ethanol, solar PV will
likely be a significant part of any future sustainable energy mix, but
that is not the same thing as saying that today’s solar stocks will be
good long-term investments. Americans watch more television today
than ever before, but were network television stations a good
investment over the last 20 years? No, because new entrants came
in and stole their audience: the industry has become much more
competitive than it was 20 years ago.
Thinking that todays
solar stocks will do poorly over the long term is not the same as
thinking that the solar industry will flop. Rather, it is the
belief that increased competition will drive down returns at existing
companies. This will be great for buyers of PV panels, but not so
great for owners of PV stocks.
Porter’s five competitive forces model of competion bears this out,
just as it did when I analyzed the corn Ethaonol Industry in
2007. The next article in this series will take a look at the
five
forces, and how they apply to solar PV manufacturers.
DISCLOSURE: None.
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indication of future performance. Please take the time to read the full disclaimer
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