Ignore These 7 Questions If You Want to Lose Money – SUNE “Case Study”

Written by  Jae Jun follow me on Facebook Twitter

Sun Edison (SUNE) is down 92% YTD.

But what the heck happened? Isn’t clean energy the future?

Why would “investors” continue throwing money into a bonfire?

This is how shareholders have been rewarded.

SUNE-stock-price SUNE
SUNE

The thing is, Sun Edison doesn’t come close to passing the sniff test. You have to hold your nose from a mile away.

Look at these numbers for a sec.

Revenue vs Cash from Ops vs FCF | Source: Old School Value Online

Some immediate “house is burning down” signs that I see from the financials.

  • From 2009 to 2014, revenues only increased a little more than 100%
  • Capex continued to escalate at a rate faster than it was generating sales
  • At the same time, cash from operations went for a dive
  • FCF took it one step further and went exponentially down

Just based on this simple data, it’s enough to run away.

But why did so many investors continue to throw their hard earned money into the fire? If the same investors used Buffett’s advice to analyze the business as if they were buying the entire company or joining as partners, the final decision would be vastly different.

Basic checks further emphasize the need to run for your life.

Sun Edison has no quality | source: Old School Value OnlineSun Edison has no quality | source: Old School Value Online

For every dollar of sales, Sun Edison uses up $1.47 of FCF.

For every dollar invested, it loses $0.24.

Accounting quality is poor also.

Sun Edison has no value | source: Old School Value OnlineSun Edison has no value | source: Old School Value Online

Constantly losing money which makes it look cheap if you just look at Price to Book, but even the book value is sinking.

Sun Edison has poor growth | source: Old School Value OnlineSun Edison has poor growth | source: Old School Value Online

For an industry fueled by government subsidies and claims of world changing technology and the tailwinds of the green revolution, sales is ridiculously slow.

5 year CAGR is 16.5%.

Tesla’s 5 year CAGR is 103%.

Sun Edison also has an appalling 2% GPA. In simple terms, this means that only 2% of their assets are profitable…

SUNE – 7 Questions That Will Determine Whether the Business is a Hero or a Zero

But the point of this article isn’t to rehash what a horrible investment Sun Edison is. It’s easy to point out what I’m seeing based on hindsight. But one man who knew this years before it happened is Peter Thiel (PayPal founder).

I finished his book the other day, Zero to One, and he specifically shows why industries like renewable energy and companies like Sun Edison are horrible investments.

The book is based on Thiel’s experience as a tech VC, businessman, and advice for startups, but it is eerily similar to reading a Buffett letter about making big bold concentrated bets and how to find one.

With this background, Thiel then provides 7 qualitative questions that businesses (or investors in our case) must be able to answer before starting a business or investing in one.

Using some of this thoughts, he’s a look at why Peter Thiel believed that companies like Sun Edison are inevitably bound to fail.

Be warned. Ignore these 7 questions and you will lose money.

Just like investors in Sun Edison.

I’ve adapted the 7 questions to be investment related and included examples from the book where it made sense.

SUNE – #1 The Engineering Question: Does This Company Create Breakthrough Technology?

Thiel says that in order for a company to truly succeed, it has to produce something that is 10x better than its nearest competitor. It’s only when the product or technology is 10x better that the company will be able to extract huge value and all those future cash flows.

Companies must strive for the 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.

Google’s (GOOGL) search algorithm was 10x better than Yahoo or Microsoft in the late 90’s which enabled them to leave the competition in the dust. Google did not invent the search engine, they just did it 10x better than anyone else and so all the others died.

Before Google dominated, I used AltaVista. One day they disappeared.

altavista-screenshot SUNE

Apple’s iPod, iPhone and iPad were 10x better than the products that came before it.

walkman-vs-ipod

PayPal was 10x better than sending checks to pay for eBay items.

For solar and renewable energy, the question was whether it was going to be 10x better or cheaper than fossil fuels. Fracking and oversupply of oil has made this even more difficult.

Even if a new solar energy company came along and claimed that their technology was tested to be 30% more efficient than other renewable energy sources, does that make it an instant hit?

What about all the costs and real world issues that will eat away that 30% efficiency claim?

Although the cost of solar is going down and there are social benefits to using clean energy, will businesses and the average person want to spend an extra $1,000 to use solar energy when they can get the same the much cheaper?

Solar-Module-Costs-Q1-2014 SUNE

What type of breakthrough technology did Sun Edison bring to the table?

None.

SUNE – #2 The Timing Question: Is Now the Right Time For This Business?

One of the legs that fueled the clean tech “bubble” was that companies like SUNE compared itself to the boom of the silicon chip industry of the 70’s.

The problem was that it wasn’t anywhere close.

In the 70’s when Intel was pushing out exponential improvements in their processors and computing power was growing quicker year over year, solar wafer improvements crawled along in comparison.

CPU-growth-chart SUNE

Even today, the highest efficiency percentage is 46% in a lab setting. In the real world, the best ones are in the twenties. The chart below is based on “research” inefficiencies. Not real world usage.

In over 30 years, it’s gone from 0% to 40%.

solar_cell_efficiency SUNE SUNE

Infrastructure readiness, social norms, government regulations, established platforms and ecosystems all play a role in the timing question.

SUNE – #3 The Monopoly Question: Is the Company a Monopoly in a Smaller Market?

Like value investors, Peter Thiel believes monopolies are a good thing, and competition is bad.

The reason to search for monopolies is that it allows them to innovate and to continue growing. By conquering a small market to begin with, companies build cash flow and can therefore try radical things. It’s the same thing that Jeff Bezos said in his latest letter.

In business, every once in a while, when you step up to the plate, you can score 1,000 runs.

This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Our scale enables us to build services for customers that we could

1, 23  - View Full Page