MEMC Shines as Play on Silicon Shortage

This column was originally published on RealMoney on Dec. 2 at 2:30 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

There is a shortage of silicon to go around the semiconductor and solar power industries, and MEMC Electronic Materials(WFR Quote) is benefiting. Though shares are up 37% to $23.24 since I first highlighted the stock in August, there is no reason to expect ample silicon supplies to come online anytime soon, and MEMC's growth appears limited only by its ability to execute, though I doubt this will be an issue.

Very few publicly traded companies offer a way to play a silicon shortage, but MEMC, which I found using CapitalIQ to search for companies with silicon exposure, is stealthily becoming a favorite among more speculative investors. The company produces wafers for the semiconductor industry and the solar power industry, but its leverage to solar power remains so far under the radar that it's not even mentioned in the MEMC's description on some financial Web sites.

Surge in Solar Powers Silicon

According to data from First Albany's alternative energy team, the solar power industry's consumption of silicon represented 40% of total silicon usage in 2004. This is somewhat surprising when you consider that the entire global solar power market would hardly be enough to power New York City for any considerable length of time. Even so, based on the 30% annual growth rate of the solar industry worldwide, it is not a stretch to assume the solar industry will soon grab the top spot for silicon consumption.

Silicon supply constraints have led to a doubling in the price of polysilicon, the type of silicon used by the solar industry, over the last 18 months. Because of this surge, MEMC has executed an operational turnaround without experiencing a sharp decline in operating profits.

Recent Stumbles

However, management has had a few missteps that I believe have affected the shares. Most recently, on Nov. 15, MEMC restated its revenue and earnings slightly lower for the first three quarters of 2005 due to a change in revenue recognition policy. The revenue will be recorded this quarter. The restated results were largely as Wall Street expected and had no impact on the stock price. As a side note, MEMC confirmed that pricing for its wafers remains strong, and that it expects prices to increase by 4% in 2006; I don't expect any more earnings issues going forward.