Any company that seeks to dominate a new industry can throw off mixed signals for investors.

 

On the one hand, investor excitement about the open-ended growth possibilities can deliver great stock gains. But when such high-growth firms are not yet consistently profitable, which is often the case, their stocks can also be exceptionally risky.

 

This brings to mind SunEdison, Inc. (NYSE: SUNE), a mid-size technology company with annual revenues of $2.4 billion. Shares of SunEdison have soared more than 400% during the past three years, even though the firm lost an average of $2.56 per share in each of those years. And the road to big returns has been rough, with share price volatility nearly five times that of the overall market. 

 

2009	2010	2011	2012	2013	2014E	2015E
-$0.31	$0.15	-$6.68	-$0.66	-$2.46	-$1.09	-$0.80

Such fast and furious share-price gains may seem unsustainable when bottom-line results are so poor, but SunEdison shareholders shouldn’t be deterred, in my view. This is one case where a high-flying, speculative stock could surge yet higher as the company continues the march toward a healthy bottom line.

 

A key reason I say this: SunEdison is a leader in solar power, and that industry is rapidly expanding.

 

In 2014, the U.S. finished the year with an additional 6,500 megawatts (MW) of photovoltaic capacity, 36% more than was added in 2013, according to the Solar Energy Industries Association. (A megawatt is a million watts.) This will bring total domestic solar energy capacity to about 20,000 MW, enough to power approximately four million homes. And that amount will roughly double again over the next two years, SEIA estimates.

 

#-ad_banner-#Through its photovoltaic energy solutions, mainly solar power plants, SunEdison currently accounts for about 3,000 MW — 15% of 2014’s projected total. And market share in the solar industry should grow well beyond that in coming years, thanks to a robust project pipeline.

 

Indeed, the firm finished the third quarter with another 297 MW of new installations and 460 MW more under construction. That quarter, SunEdison also reported a sequential 71% backlog increase to 1,800 MW. Three-quarters of the backlog is slated for the United States and Canada. The rest is spread over Europe and emerging markets such as Latin America, South Africa and Asia.

 

In November, SunEdison announced plans to further diversify through a $2.4-billion joint acquisition with its subsidiary TerraForm Power, Inc. (NASDAQ: TERP), an 808-megawattt solar energy company headquartered in Maryland. Together, the two will purchase privately-owned First Wind Holdings, Inc.

 

First Wind is primarily a wind energy producer with more than 1,000 MW of capacity in operation. The company has a small amount of solar capacity, as well. The buyout comes with a project pipeline in excess of 2,100 MW, the bulk of which will be developed by SunEdison to establish a strong presence in the domestic wind energy market. Management expects the First Wind acquisition to close in the first quarter of 2015.

 

On a pro forma basis, SUNE now sees production of facilities capable of generating 2,300 MW of power in 2015, up from a prior forecast of 1,600 to 1,800 MW.

 

SunEdison will need a couple years to fully develop its First Wind projects. But once it does, a chunk will be transferred to TerraForm, which was spun off from SunEdison in July as a ‘yieldco’ — a company formed specifically to hold developed assets producing reliable cash flows.

 

For SunEdison and other renewable energy producers, yieldcos have become an increasingly popular method of raising capital for new projects by packaging income-producing projects into a separate entity. The yieldco then distributes cash flows to its shareholders as dividends.

 

The stage is now set for SunEdison to deliver rapid sales growth, which should help drive future stock returns. Current sales are up about 20% from 2013’s $2 billion total, and analysts project another 35% increase to nearly $3.3 billion in 2015. From there, further double-digit growth is possible as the company continues to rapidly expand.

 

Of note, SunEdison also has substantial semiconductor operations, which currently generate about a third of total revenue. However, the segment, which makes silicon wafers for use in consumer electronics, the industrial sector and SunEdison’s own solar cells, is expected to be a progressively smaller revenue source as management focuses more on the alternative energy businesses.

 

Not surprisingly, ongoing operating losses have led SunEdison to rely heavily on debt to finance operations. According to Morningstar, the firm has a debt-to-equity ratio of nearly 14 — well above the 1 or 2 ratio generally considered reasonable for a capital-intensive business. Capital expenditures and other costs of doing business are also considerable, leaving the company with negative free cash flow of $2.4 billion during the past 12 months.

 

While SunEdison can’t continue to take on ever-higher debt levels, its finances are still manageable. The firm has $841 million in cash and total current assets of more than $2.6 billion. That provides breathing room for a few more hours, at which time the company may transition into profitability.

 

Risks To Consider: A protracted decline in oil prices could hinder the switch to alternative energy enough to materially damage SunEdison’s sales, currently the key driver of the firm’s stock price.

 

Action To Take –> Don’t expect oil to end up affecting SunEdison all the much. Some prominent industry experts are already projecting crude will get back to $70-to-$80 a barrel or even higher by the middle of 2015, so any negative impact on SunEdison appears likely to be short-lived. Thus, I see the stock as a strong buy with 35% upside potential in the coming year, based on projected sales of $12.07 per share and a current price-to-sales ratio of 2.2. In terms of stock price, this implies a one-year gain to $26.55 a share from $19.65 currently.

SunEdison has been gaining momentum since 2012, and academic studies have shown that strong momentum is one of the only indicators that has consistently outperformed the market. In fact, two of my colleagues have been quietly testing the Maximum Profit system, which is making a small group of investors a lot of money. It flags exactly which stocks are about to jump double, even triple digits in the coming days, weeks and months. And it recently tagged a few more stocks that could do the same. After nearly two years of beta-testing they are finally revealing this system. To learn more, click here.​