Commentary for November 9, 2007  Introducing Akeena Solar
 

Akeena Solar (AKNS) will be reporting their Q3 2007 earnings on Tuesday, Nov. 17th, and I wanted to give a little preview of what to expect. They install residential and small business solar systems in CA and NJ and have been on a tear lately, opening 5 new offices in 11 months in California. 85% of the nation's solar installations are performed in California and Akeena is at the center of that growth. The U.S. residential solar market is expected to grow at a 64% annual rate for the next three years.

Akeena's Q2 earnings grew 168% compared to Q2 2006 and overall 2007 revenue is expected to increase 135% compared to 2006 (est. $31.4ML). To put that in perspective, Akeena at $8 is trading at 6.5x 2007 sales (est.) This compares very favorably to Suntech (10x sales); First Solar (50x sales) and Sunpower (20x sales); plus Akeena is an American company. They are posited at the very end of the solar food chain - installation - where they have direct contact with the needs of their clients.

Akeena has raised an additional $26ML in a private placement at about $7.00 share, and has a new patented solar panel that requires 25% less attachment points and 70% less parts. This panel reduces installation costs by (-$.50 to -$1.00/watt), reduces time for installation by 50%, and will be manufactured by Suntech (STP) in China. This panel should bring about a 10-15% increase in their gross margins going forward. The capital raised from the private placement will be used to manufacture the Andalay panels and sell them to other installers.

Follow this link for Akeena's recent presentation at the Pacific Growth Equities Clean Technology and Industrial Growth Conference.

I am looking for Akeena to hit $10 by the end of December.

Solar Sociology

What a week for solar companies! On Tuesday and Wednesday First Solar (FSLR) leapt 65 points and Sunpower (SPWR) 35 points; all this while the Dow dropped -360 points and the Nasdaq -75. How's that for relative strength? I haven't seen stocks move like this since the Internet days of yore.

Yet as most investors in this industry know, we still are in the earliest of innings, especially the United States. Market advances in technology are led by exciting new ideas, a momentum that is part enthusiasm, part reality, and part froth. Yes it's speculative, but when a tech idea grips the investing public it's a little like watching euphoria - effortless and ridiculous at the same time. No experience needed. Just come and get some money. And it drives sidelined non-participants and critics nuts.

A virtuous circle can accompany speculation if the entry point is timed correctly. Speculative fervors usually run 5-7 years before they exhaust themselves, and while they run you can do very well. Let's do a little review from recent market history: large cap tech from 1993 to 2000; Internet stocks from 1996-99; oil stocks 2003-Present; Real Estate & homebuilders 2000-2005; financials 2003-2007; International emerging markets and Eastern European stocks 2003-2006.

Now it's the solars' turn and we're only into this 16 months. Solar in 2007 is like investing in Yahoo in 1996. Over 30% of venture capital allocation in 2006 went to Alternative Energy. It's probably more than that in 2007. Much of that investment will be coming on-stream in the next two years. For all the hullabaloo about too much supply and too many solar IPOs, there's still not enough to meet the demand for product, and there's very few trained installers.

Solar companies with ramping earnings are making their current revenues from Germany (#1), Spain, and Italy. What will happen to those revenues when the big three geographic customers are USA, China, India? It will result in exponential growth. Suntech opened their U.S. headquarters in San Francisco last week, and the CEO said that the U.S. would be the largest solar market in the world in 4 years.

Solar power obviates the need for purchasing energy. First of all, the source is free. Its benefit goes right to the bottom line ($) of whoever uses it. Unlike wood, coal, oil, or natural gas - you extract it electronically from the sun with the flip of a switch. You pay for the machinery that does the extracting, not for the power itself. There are no moving parts. No wells, drills, caves, miners, or gas. This is a paradigm shift as large as the movement from horses to cars, or wood to coal to oil. The price of a solar installation on a 2800 sq ft home (with rebates) is a little less than a Honda Civic and is guaranteed to last for 30 years. After 5-8 years it's paid for itself. But it gets better. Because of the rising cost of heating oil and the estimated future reduction in polysilicon (the complex element used to make solar cells), solar will be on a parity with fossil fuels in 5 years.

Once upon a time (a few years ago) the Internet seemed the province of geeks and futurists. Now it's ubiquitous. What happens when alternative energy becomes mainstream, or when our government supports it? Polls continue to show that the current slate of legislators is viewed as out of touch with their constituents. There is strong public demand for both energy efficiency and energy independence from foreign oil. In all likelihood, there will be a landslide change in both houses of congress (and the White house) in 2008. The legislation being bandied about in congress would triple the number of solar installations in the states. The president has sworn to veto it, but after he's left office? I think some kind of energy bill is going to be passed.

Solar energy is efficient and keeps pace with the tech world - doing more with less energy. It's a virtuous circle of cost savings and innovation that has the potential to go right to the bottom line of large warehouses and merchandisers. That's why I don't think alternative energy will be "going away" any time soon. What's cheaper - replacing a light bulb every few months or an LED once a decade? When you add in the labor cost and the energy cost of that change, just the savings in lighting is exponential. If commercial and residential construction combined solar energy with LEDs, lighting cost might be reduced by 70%. The same for Walmart, department stores, Cosco, Home Depot, etc. Millions of square miles of roofs covered with thin film solar.

So I maintain my stance that we remain in the early innings for many of these solar companies, and at every new resurgence in the markets, these stocks will find their way towards the top (again). The next leg up is here.

Analysts at UBS securities are predicting a quadrupling of polysilicon supply in the next two years as more factories come on-stream to supply the voracious market demand for polysilicon wafers. The single biggest cost to solar cell makers - and the single biggest detriment to solar adoption today - is the high price of raw polysilicon. It is 70% of a solar cell maker's cost structure. Even companies like Suntech (STP) - which have their entire 2007-08 inventory sold out - must go to the expensive spot market for 25-50% of their wafers. The cost of wafers is what has sunk the share prices of the smaller solar cell makers: China SunEnergy (CSUN), Canadian Solar (CSIQ), Solarfun (SOLF).

All that's about to change. UBS estimates the cost of raw silicon for wafers is going to fall 66% over the next 3 years, from $300/kg to $100/kg. Solar has overtaken the market share for raw silicon once held by the semiconductor industry (for decades). This acceleration in polysilicon supply will reduce the materials cost for solar cell makers to 25% from today's 70%. That cost savings ($) can go right to the bottom line: strengthening profit margins, reducing prices for consumers, and making solar adoption more widespread. Solar can be more affordable, more doable, and on a parity with oil in 5 years. Demand for this new energy today is unprecedented. Industry estimates are for 50% year over year growth; yet it is not even 1% of the world's energy source.

There are two more aspects to this picture: government subsidies and technological improvements. The explosive profits in the solar sector have thus far been coming from Germany, Portugal, and Spain. In two years a Democratically-controlled congress (by a wide margin) will be the majority ruler and it is very likely we will have a Democratic chief executive. The leaders in both houses of congress are from western states (CA, NV) which have already hosted large solar initiatives and projects, states with solar industries which stand to benefit from a favorable tariff pass-through rate if initiated by congress. They also set the committee agendas. I don't see who would be able to stand against a national solar initiative or why.

Green is growing in popularity daily and $100/bbl oil encourages policy initiatives. California already pays a solar construction rebate of $2.25/watt for residences and businesses, and $3.25/watt for non-profits. If a Federally sponsored bill was added to that (and this seems likely), it would encourage homebuilders and corporations to go green.

The last piece of this puzzle is Moore's law, named for Gordon Moore, the Intel executive, who opined that semiconductors could double their performance capacity while reducing their costs as tech cycles sequenced into the future. These kinds of technology advances are already happening in the development of silicon solar cells. The technology is similar - with the same substrate (silicon) - except the focus is energy output rather than data transmission. The best minds in the industry are working on this task, and like any project that is market-driven, the more minds, the quicker the innovations and improvements. Solar cell efficiencies are rising about 9% a year. That's small, I know, when you're beginning with efficiencies in the range of 6-9% (thin film) and 16-20% (cells), but over 5 years there's a possible 50% increase.

In summary, several trends are creating a virtuous circle for the adoption of solar energy in the U.S.: venture capital research and development; semiconductor companies leveraging their experience with silicon into solar ventures (to diversify their portfolio of offerings); an informed public demanding the political will for green initiatives; the sustained high cost of oil and energy which weaves its way into every part of our lives as a net tax; and demand demand demand.

It's estimated that a solar farm on a barren 50 square mile chunk of the Nevada desert would create enough power for 20% of the Western United States. I agree with several commentators who've said that alternative energy is indeed the investment opportunity of the decade. Watching First Solar go up $60 in a single day will clue you to what's ahead for the residential and commercial solar market in the U.S.

Akeena Solar (AKNS) is at the forefront of the residential market. That's why they remind me so much of Cisco - their direct contact with customers informs and develops their product offerings. Investing in Akeena is like watching a cat and a mouse (the solar panel & installation market) on a square mile of linoleum. Akeena Solar is the only publicly-traded pure play panel maker/installer on the Nasdaq. If the cost of silicon redacts downward ($) and an energy bill gets through congress in 2008, and Akeena makes the right choices in how it allocates its capital,  revenues and margins could expand exponentially.