Daqo New Energy: Solar Monopoly Launches $100M Buyback

Key Points

• Daqo New Energy is buying back $100 million of its own stock, a significant amount of its market capitalization in a sign that the bottom might be in.
• As the largest polysilicon player in the world, this company holds a near monopoly when it comes to solar energy.
• If oil prices were to rise, the demand for renewable energy sources could be the perfect catalyst for this stock to take off.

Some in the financial media space say the S&P 500 is becoming too expensive, and some historical valuation methods suggest this might be the case. However, one fact remains: today’s economy and market are very different from the ones these indicators used to predict with high accuracy.

With the rise of artificial intelligence and technology, defining what true value means is difficult. But, that also creates a sense of unease, added uncertainty and all. That's why some institutional investors are starting to shift into overseas companies with strong fundamentals trading at steep discounts below their true value. One such company is a Chinese energy firm playing a key role in the global energy sector.

That name is Daqo New Energy Corp. NYSE: DQ, a leading polysilicon producer in China with growth rates in both revenue and production that should be drawing more attention than they are today. However, before highlighting some of the positive statistics, investors need to truly understand why this company could become a major player in the coming years.

The World’s Solar Monopoly

Monopolies often get a bad reputation, but only when they drive up prices for customers and push others out of the market; however, Daqo New Energy has no evidence to suggest that this is the case. The company's true monopolistic power is rooted in a two-fold aspect, starting with China itself.

Investors should recognize that China is the world’s leading manufacturer and exporter of polysilicon, a crucial raw material used in the photovoltaic process (the method for producing energy from solar cells) that is incorporated into solar panels. What all this means is that behind every new solar panel built worldwide, there lies Daqo New Energy.

So, not only does the company operate in a country that dominates the supply of polysilicon, but Daqo New Energy is also China’s largest producer and exporter, so there should really be no further questions as to the importance of this company in the next wave of renewable energy and its development.

Now, let's consider other key factors related to market perception of Daqo New Energy stock, which may influence retail investors to see today’s low prices as a potential buying opportunity.

An Attractive Setup for Daqo New Energy Stock

At just $1.7 billion in market capitalization, Daqo New Energy doesn’t accurately reflect its current position in the polysilicon and solar energy markets, especially considering the significant share of the entire space this company owns, which is something investors should keep in mind today.

Insiders have taken note of this, which is why the company’s management recently approved a $100 million stock buyback program, sending a new vote of confidence from those who know the company (and its value) better than anyone else.

This amount, which represents just under 10% of the company’s size, is an aggressive message for better things to come into Daqo New Energy. Still, there is more to this announcement than just the entire buyback amount. Stock buybacks historically signal that a company is trading well below its true intrinsic value.

Given that Daqo New Energy's current market capitalization results in a price-to-book (P/B) ratio of only 0.3x, investors might assume that the entire balance sheet of this company could be purchased at a steep 70% discount. Considering how much of the commodity they produce, this discount likely won’t last much longer.

That doesn’t necessarily mean the ride will be a smooth one. First of all, this is a Chinese company, and investors today aren’t too fond of putting their money in the hands of overseas companies (much less Chinese ones). However, there is another macro factor keeping this stock cheap.

That factor is where oil prices are today. Considering how cheap (historically) oil prices are, traditional sources of fuel and energy are affordable enough to turn the attention away from renewable energy like solar, which in itself is keeping the market’s attention and capital away from Daqo New Energy.

That being said, investors must be aware that the cyclical nature of energy markets will eventually shift the pendulum in the other direction, especially if the United States Federal Reserve does end up cutting interest rates in September 2025, thereby boosting economic activity and, consequently, oil demand.

Suppose this scenario is enough to turn oil prices higher. In that case, alternative sources will likely come back to the stage, and that is a clear catalyst investors can keep in mind when timing their potential investment in the deeply discounted Daqo New Energy.