Solar stocks could be entering their own dotcom bubble

The chart above shows the biggest corporate users of solar power. Apple, the number four company on the list of biggest solar users, might be installing solar panels to curry favor and environmental credit with its customer base. However, it is very unlikely that Walmart or Walgreens customers, for example, care whether those firms use solar power – solar installations in these situations are going to be done because they are economically sensible, not because they have environmental benefits.

Solar is being widely used by corporations across many of their facilities. Almost a third of Target stores and General Motors plants have solar power installations. These facilities are particularly concentrated in the Northeast and on the West coast. The sunny West Coast probably derives its installations largely from economic benefits, whereas in the Northeast a combination of high local power prices and state government incentives may be behind the installations. None of this is to say that solar power has run out of attractive installation options though. Only 7 percent of Walmart’s more than 5,000 facilities have solar power installed, while only 2 percent of Albertson’s supermarkets roughly 2,000 locations have solar installed.

The broader point is that solar power is being used in a variety of settings by businesses and that is a sign that the installations have durable economic value. Companies do not invest large amounts of money into long term capital goods like solar panels without confidence that the projects will pay off over time. As these projects have picked up steam though, it helps to drive down the costs for future projects due to economies of scale.

Yet investors need to be very careful when choosing stocks in the space. Even if solar power really is a durable industry that is here to stay, none of this is any guarantee that solar companies today are a good investment. Those who remember the internet bubble will recall that the vast majority of internet companies failed in the bursting of DotCom bubble. Amazon has been a major player since the start, but other winners like Google and Facebook did not emerge until much later. Similarly, numerous early firms in the space failed while others fell behind new entrants. The same pattern may emerge in solar. Investor beware.