Daqo New Energy Corp (NYSE:DQ) is a manufacturer of monocrystalline silicon and polysilicon. These are vital materials used to create photovoltaic (PV) solar systems. The company was founded in 2007 and is dual headquartered in Chongqing, China and the Cayman Islands.
Its products are essential for the solar industry, but is Daqo New Energy stock a Buy?
Solar stocks are a hot commodity now that Democrats are in control of the White House and Congress. Liberal politicians tend to favor environmental sustainability and green initiatives. When the November election changed the power structure, solar stocks soared in response to the blue wave, and Daqo was no exception.
The incoming President wants a 100-percent clean power grid in the U.S. within 15 years, and he could be at the country’s helm for half of them.
Of course, the U.S. isn’t the only country with a government in the world. The fact that the company based itself in the Cayman Islands says a lot about how difficult it can be to navigate geopolitical and socioeconomic issues.
No matter how neutral they try to be, some companies get caught up in trade wars. Just ask TikTok.
Let’s shine a light on Daqo New Energy to determine if it can still heat up investor portfolios or if it’s just a flash in the pan heading for burnout.
What Does Daqo New Energy Do?
Daqo New Energy is a manufacturer and supplier of silicon used in a variety of modern applications. From solar panels to computer chips, silicon is an essential material in today’s technology.
Although solar is a major part of its business, it doesn’t directly produce solar PV modules. Instead, the company creates the mono-Si and poly-Si and supplies them to downstream manufacturers. This creates long-term agreements that generate relatively predictable revenue.
Polysilicon prices are rising, and the company can pass those costs on to its clients to improve operating margins. And it has several deals in place to guarantee profits through December 2023.
In 2011, it added silicon wafers its manufacturing capabilities, although it discontinued that business in 2018. Still, it could face governmental heat during an escalating trade war between the U.S. and China. That trade war is something a new administration isn’t racing to fix and could only get hotter.
Still, some hedge funds are bullish on the stock because of its market positioning. The PV manufacturing process isn’t a pretty one. It involves a lot of toxic chemicals, and it’s a risk that countries like the U.S. may appreciate being taken on in China.
However, China also has less use for solar energy in some parts of its country. It’s not an ideal solution everywhere, as sun conditions vary drastically. Even in a desert like Arizona with year-long sun coverage, only 7 percent of power generation comes from solar.
This has investors wondering if Daqo is a wise investment.
Is Daqo New Energy Stock A Buy?
Daqo New Energy started 2021 with a market capitalization over $6.5 billion and a P/E ratio well over 400.00. Its share prices fell to a 52-week low of $8.32 during the coronavirus crash before quickly recovering to pre-pandemic trading levels of $15.00 by summer.
By September, Tesla picked up steam along with the entire solar industry. The company quickly climbed over $40.00 and kept going. It opened 2021 trading around $60.00 and is just under $100.00 in the last week of January.
Its revenue for the third quarter of 2020 rang up at $125.50 million, which gave the company $45.3 million in gross profit. Polysilicon production outweighed sales volume by nearly 5,000 MT in the quarter, showing how sensitive the market is.
Second quarter profits were $45.3 million off $133.5 million in revenue, which came out to about $0.10 earnings per share for the period.
The company doubled profit margins between those two quarters while resuming full production by August. In that time, the company ramped up its manufacturing automation capabilities with a digitized process.
Of course, solar power has risk involved.
Risks of Buying Daqo New Energy Stock
Solar adoption is growing compared to previous years, but it still isn’t where the industry hoped to be 20 years ago. And Daqo is one of the more overvalued companies in the sector. Its value is that it works so far up the supply chain that it profits from other manufacturers, but future success is already baked into the price.
Its trading price is a premium over everyone else in the industry except Tesla, which already attracted the attention of short sellers.
Daqo also runs the risk of being delisted from the New York Stock Exchange. The exchange already delisted three Chinese companies in response to an executive order at the beginning of the year. Asia is also slower to adopt solar, because weather conditions are less than ideal for it.
The company lacks the competition others do, but that doesn’t mean it has a secure monopoly.
Can Daqo New Energy Competitors Win?
Daqo’s biggest competitors may ultimately be its own clients. The 2020s saw many device companies bringing microchip manufacturing in-house, signaling the end of an era for those manufacturers. A company like Qualcomm (QCOM) could easily transition into PV silicone manufacturing if it turns out profitable.
But the bigger threat is that the solar industry also vertically integrates to bring its silicone manufacturing in-house. It’s a cost-prohibitive solution, but it also may be a way to maintain competitive advantage and decrease production costs.
Should the industry move that direction, this Chinese manufacturer could see rocky waters ahead.
Is Daqo New Energy Stock a Buy? The Bottom Line
Daqo New Energy is a Chinese manufacturer of silicon used in solar photovoltaic applications. It’s a supplier for solar companies and thus profits from the overall success of the industry. This makes it like Qualcomm and other silicon chip manufacturers.
In fact, the company briefly dipped its toe into silicon wafer manufacturing. It found the industry too competitive, but it may find itself competing with it anyway in the future.
American tech companies are increasingly bringing manufacturing in-house, and Tesla is already vertically integrated with its own solar manufacturing. Should industry trends continue, Daqo needs to pivot to adjust to changing market conditions while dodging a geopolitical minefield.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.