I was reviewing my old posts and found this one, R&D Spending a Tale of 2 Companies. In it I discuss the portion of spending on R&D of First Solar (FSLR) and Suntech Power (STP). I noted that the ratio of spending for STP was low relative to the amount spent by FSLR and that as a whole the cadre of solar companies were spending relatively low amounts on R&D. I made the implicit assertion that the innovators will win this market.
I wanted to see how the two stocks had fared since my post. In figure 1, I have plotted the relative performance of the two stocks since the day of that post.
Figure 1. Relative Performance of FLSR and STP
While FSLR has outperformed STP by almost 32%, it still lost more than 1/3 of its value in that time. During this same time the NASDAQ increased by 23%. Classic case of fundamental analysis missing the stock price action. In short, I was “less wrong” – a far cry from being “right” on the stock action. However, if you are pairs trading or measuring relative performance between the two stocks, then not too bad.
On a fundamental basis, as I re-read my post, I was struck by my initial assumption that this business is about technology and innovation. In retrospect, it is about technology and yes innovation is important. However, all of these need to be focused on relentlessly driving down costs. And while I did mention the need for economic parity with current, carbon based generation technologies, cost is a 1st order driver- not technological innovation.
Why is this important? Because an analysis that merely takes into account costs is very different from an analysis that is driven by cost. This is akin to a small course error across a large distance. For example, a rocket ship that is traveling to Mars will miss the mark by a wide margin if it is off course by a small amount. Likewise, in a long term market such as electical generation and distribution, a small error in assumption will lead to a large missed opportunity in the long run.
And from all appearances, the long run of solar power looks very bright. This brief teaser of a statement by a researcher from the International Energy Agency tells the whole story. Solar energy is poised to be the dominant energy source for the world by 2060. What have I learned? That it will be low cost that will get us there, everything else will be ancillary.