Intel (INTC) Creates a Solar Company Spin-Off

Submitted By Trader Mark
Ignore the bashers who say solar power is hype - they, much like the Federal Reserve and our government leaders still live in the 1970s/1980s. [Jun 7: As Energy Costs Soar, US Looks to Solar] With or without government, pure economics is going to drag the United States of Subprime into the new era, right about the same time China jumps in full scale... (note of oil falls to $40 by Halloween this post will be deleted and I'll disavow any knowledge of solar) Granted, it would be healthier for us all if the government actually helped instead of hindered, but that's asking too much - you'll have to move to a socialist European country for such crazy ideas.

That said, as I've warned multiple times - while the trend is clear for the industry, ultimate winners and the marketplace holds many uncertainties [Jan 3: The Long Term in Solar] I wrote

Let me preface this post by saying I am a long term bull on solar, and in fact was an 'early adopter' among the investor class, that is I was invested over a year ago in my personal account. So I am not a Johnnie Come lately to this area. With that said, I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue] In fact Jeffries analyst even thinks this is going to start happening next year [More Concerns about Solar ASP Pricing]. It is not a matter of if, it's just a matter of when ... but "when" is the key to investing in this space. (one can make a lot of money, before having to face the music)

We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone. This will shake out much like the semiconductor industry and in the long run I believe there will be 5-7 major giants who will be quite profitable companies. But where does that leave the other 50-70-90 (and more coming each quarter online?)

Yesterday's announcement by Intel (INTC) highlights these "long term" risks - as did the foray by Applied Materials (AMAT). Solar dreamers will tell you there is room for many many winners because the opportunity is so huge. I do agree the opportunity is huge, but I've never seen any business sector where there are 30 or 40 winners. In the end this will be a high volume, low margin business - almost equivalent to the semiconductor business unless/until a different technology breakthrough comes down the road. Price wars will be rampant. So there will be great shakeouts - and the ultimate winners in a decade could be names we haven't even heard of yet. But as we always say, the "long term" on Wall Street is next month, so we'll just keep our investing dollars focused on the next 6-12 months, while ignoring the blithe frothing at the mouth from people who believe 100+ companies are going to be ultimate winners because solar is just 0.0000001% of today's energy use.

I would say JA Solar (JASO) is a key solar cell supplier so this move by Intel, onto what appears to be their turf could be a danger sign. Now, at this point in the solar cycle - when any 1 company reports something good, they all trade together as if competitors doing well is a great thing. I've been fascinated to watch this, but over the medium term people will begin to realize these are competitors and great news for company A means company B has more stress. But watching this sector for 2 years now, I expect no one over at JA Solar to care about Intel potentially invading their turf - buy buy buy. One more positive? Jim Cramer can now tout Intel (INTC) as the great next solar company like he does with Applied Material (AMAT) and First Solar (FSLR) ;) (he actually calls First Solar the Intel of Solar - so what will he now call Intel?)
  • Intel(INTC) is joining the growing ranks of chipmakers with solar energy aspirations, announcing the spinoff of its key photovoltaic assets into a new standalone company Monday.
  • Intel's investment arm, Intel Capital, will lead a $50 million funding round in the new company, to be called SpectraWatt. Goldman Sachs subsidiary Cogentrix Energy will also pitch in on the deal, along with a couple of other investors.
  • The company is expected to begin shipping products by mid-2009, with construction of a new manufacturing facility in Oregon slated for later this year.
  • Earlier Monday, IBM(IBM) announced a partnership with Japan's Tokyo Ohka Kogyo, a semiconductor manufacturing equipment firm, to develop low-cost methods for producing solar energy products.
  • Applied Materials(AMAT), the world's No.1 maker of semiconductor manufacturing tools, is pouring resources into a new business group dedicated to building and maintaining solar panel factories.
  • Intel said that SpectraWatt will manufacture and supply photovoltaic cells to "solar module makers," while focusing on manufacturing improvements that lower the cost of solar energy generation.
Pathetic stat of the day - the market capitalization of First Solar is higher than all the Chinese publicly traded solar companies put together. Now that's Cramer power for you. We'll see how that looks a year from now when polysilicon prices begin to really drop (which have been holding down gross margins), and these companies which have been stifled by the high prices can go head to head on product pricing. It will be interesting indeed - somehow I see that halo around First Solar being knocked off a bit, if not in 1 year, certainly within two.

Long none mentioned; I only own solar stocks that pull surprises at their earnings call every 90 days.

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