Green technology represents a dilemma for investors.
On the one hand, it’s a great way to get in on the ground floor of a burgeoning sector with global exposure.
On the other hand, green often involves a big gamble on unproven technologies.
And analysts caution that while government funds, such as the Obama administration's stimulus package initiatives, are helpful, it's unclear how much private investors will be willing to fund large projects in the near term.
Project Funding Rebound?
The investment environment is beginning to improve, following tough first half of the year when funds for large-scale wind and solar projects dried up in the midst of the financial crisis.
According to Greentech Media, venture capital investment in green technologies totaled $1.9 billion in the third quarter of 2009. Though that’s down sharply from the $2.8 billion invested in the same period in 2008, it’s much higher than the $836 million and $1.2 billion reported in the first and second quarters, respectively.
“Everything’s improving off a pretty dismal first half of 2009,” says John Hardy, senior research analyst at Broadpoint AmTech. “The areas of growth that are still on the mend are some of the larger electricity-generating projects that require a lot of project financing—large solar farms, large wind farms. We’re starting to see some signs of stability there, but it probably won’t be fully healed until some point in mid-2010 or beyond.”
Hardy notes that U.S. demand for solar and wind power is on the rise. With that in mind, companies that have large exposure in the U.S. market could benefit in the second half of 2010, including solar technology firm SunPower and two international wind turbine manufacturers—Denmark’s Vestas Wind Systems and Spain’s Gamesa .
“2010 is going to be very interesting depending on how quickly project financing does come back, whether it’s the first half of 2010 or whether it remains stagnant until the second half,” Hardy says. “On a worldwide basis, solar unit demand is probably going to be up anywhere from 50 to 60 percent. For wind, it’s going to be more like 25 or 30 percent.”
Taking a global view is a key strategy for green tech investing. Ben Schuman, senior research analyst at Pacific Crest Securities, notes that wind power in China is a particularly attractive area.
Earlier this year, a Chinese government official said the country will invest $14.6 billion to boost its wind capacity to 30,000 megawatts by 2010, a decade ahead of its original schedule.
“They haven’t been impacted by any of the fallout of the financial crisis,” Schuman says. “They just continue to grow investment in wind power in China, and we don’t see that falling off anytime soon.”
Schuman points to American Superconductor as a way to play China’s growth in wind investment. In September, the company signed a $100-million deal to provide core electrical components for 3-megawatt wind turbines produced by Sinovel Wind, China’s top wind turbine manufacturer.
International exposure is also a key metric for waste energy firm Covanta Energy , geothermal energy company Ormat Technologies , and energy storage manufacturer Maxwell Technologies , according to Michael Horwitz, clean technology research analyst at Baird.
“For Covanta, they’re building new plants outside the U.S., and there’s more growth outside the U.S. for waste energy than inside,” Horwitz says. “Ormat has tremendous opportunities as there are some large geothermal plants being built around the world. Not only is Ormat a producer of geothermal electricity, it’s also the largest equipment maker in the geothermal industry, so they sell equipment to other players who are building plants.”
Horwitz adds that China has set a goal of raising its annual production of electric cars and buses to 500,000 by 2011. Earlier this year, Maxwell reached a $13.5 million deal with three Chinese bus makers to supply ultracapacitors for their new hybrid vehicles.
Along with geographically diverse portfolios, Horwitz likes that fact that Covanta and Ormat produce what he calls a cost-effective, renewable electricity baseload.
“It’s on all day long,” he says. “Whereas when the sun shines, solar works; the sun doesn’t shine, solar doesn’t work. No other energy production has uptime like waste energy and geothermal. As utilities are looking at renewable energy options, they’re coming to realize the attributes around that uptime and the cost effectiveness of waste energy and geothermal. That could produce a good five- or 10-year run for both of those companies.”
Still Early in the Game
As for the U.S. market, smart grid technology recently received a boost from the federal government. Last month, President Obama announced $3.4 billion in grant awards to push the transition to a national smart energy grid.
The grants, part of stimulus package, will fund a broad range of technologies, including smart meters that wirelessly send information about electricity use directly to utility billing departments. Since the grant announcement, shares of smart meter maker Itron have climbed 8 percent.
But Jeff Tjornehoj, research analyst at Lipper, cautions that it’s too early to tell how much growth there will be in pure-play firms that provide technologies such as smart meters and energy storage.
“Investors with a diversified portfolio already have some exposure just by owning some of the larger industrial names out there,” Tjornehoj adds. “A company like a GE might not be associated with the environmental movement, but they’re one of the largest wind turbine producers in the world. They’re actually better suited to capture this trend than some of the smaller firms that have to compete with GE and have very little financial backing.”
But Horwitz points out that both Covanta and Ormat have a history of solid results. Ormat handily beat analyst estimates with its third-quarter results, and Covanta reported $1.7 billion in revenue in 2008.
“We like the stability of those businesses, we like the fact they already have fairly good scale, and they’re operating in an environment where the macro will help them going forward,” Horwitz says.
Nonetheless, Tjornehoj says investors will serve themselves well by waiting to see how things shake out.
“It pays to be patient,” Tjornehoj says. “It’s more of a generation goal, it’s not something that gets done in a couple of years. There’s not a big bucket of easy money out there for green technology to dig your hands into.”