Wall Street and Short-Sellers Are Wrong About First Solar

Wall Street analysts and short-sellers have come out in droves against First Solar (Nasdaq: FSLR  ) recently, and even my fellow solar followers at greentechmedia have joined the chorus. As of June 15, the short interest in First Solar had ballooned to 22.3 million shares, or 38% of the float and 15 times the daily volume.

The reasoning for shorting First Solar boils down to a few bullet points that aren't inaccurate but fail to paint the entire picture. I'll try to dispel them one by one.

Theory: Poly Si is more efficient, leaving First Solar's less-efficient panels in the dust as costs fall.
My Foolish reaction: True, as I've stated here I do like higher-efficiency panels because it lowers balance of system costs. But this logic discounts the fact First Solar is increasing efficiency constantly (11.1% to 11.7% Y/Y) and spends more than any company on research and development.

SunPower (Nasdaq: SPWRA  ) spends just over half of what First Solar spends on research, and competitors like Suntech Power (NYSE: STP  ) , Trina Solar (NYSE: TSL  ) , and Yingli Green Energy (NYSE: YGE  ) are each spending around 1% of sales on R&D -- far below First Solar's 3.7% of sales.

Are we under the assumption that thin-film technology will never change? That First Solar's CIGS laboratory will fail to make a breakthrough or that no other material will emerge? The engineer in me says First Solar will find something and keep improving efficiency for the long term.

Theory: In time, Chinese competitors will pass them by.
My Foolish reaction: The first reason this is absurd is that First Solar could buy many of its competitors if it wanted to get into the polysilicon business. First Solar ended last quarter with $555.7 million in cash and short-term investments on hand, more than Renesol (NYSE: SOL  ) and Hanwha SolarOne (Nasdaq: HSOL  ) are worth on the open market.

You're telling me that if these companies start taking enough sales to put First Solar's technology into question, the company wouldn't gobble one of them up?

The second reason they won't is because First Solar has one of the largest project development units in the world. Even when there's pricing pressure in the open market, First Solar can transition panels to its own projects. Chinese manufacturers will not make First Solar obsolete.

Theory: Margins will be crushed in the future.
My Foolish reaction: Analysts at Maxim Group think $1-per-watt solar panels in the near future will threaten First Solar's very existence. But who exactly is going to make panels for less than $1 in the near future? Trina Solar is manufacturing panels internally for $1.16 per watt and has seen costs rise. The rise in the price of silver has put pressure on polysilicon manufacturers, and silicon prices can only fall so far. There just isn't any reason to believe costs will dramatically fall $0.30-$0.40 to make $1 per watt profitable for manufacturers in the next year or two.

Meanwhile, First Solar is already making solar panels for $0.75 per watt, a cost no polysilicon manufacturer can come close to, and costs are falling while efficiency improves. First Solar also doesn't have the same price pressures or swings as other manufacturers, which generally use the same materials, and can focus on slow and steady improvement. Margins may fall, but with a 45.8% gross margin last quarter, I think First Solar can handle it.

A short squeeze waiting to happen
The last time short interest was this high was at the beginning of 2011. Shares of First Solar promptly ran up more than $35 into mid-February as the shorts ran for their lives. Are we in for a repeat of that story?

Foolish bottom line
I have a medium-sized position in First Solar, and while I don't think it's going to double in price anytime soon, a 38% short interest is absurd. First Solar is an industry leader, has built-in demand for its products, the lowest costs in the industry, and the R&D team to make a breakthrough in the future. That sounds like a company I want to own, not a company I want to bet against.

I'm sorry Wall Street (and short-sellers), you're wrong about a solar stock again.

Interested in reading more about First Solar? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2011, at 5:00 PM, robitybob wrote:

    Here is a well researched article regarding First Solar and its' need for tellurium:

    http://seekingalpha.com/article/275817-is-first-solar-mining...

  • Report this Comment On June 28, 2011, at 10:43 PM, ewesoff wrote:

    I am the author of the Greentech Media piece you reference and I believe it is unfair to characterize us as supporting shorting FSLR. I just reported on the IBs who seems to be supporting that course of action.

  • Report this Comment On June 29, 2011, at 1:05 AM, TMFFlushDraw wrote:

    @ewesoff

    Really? With a title of "Shorting First Solar, Again", a subtitle of "Eventually, shorting First Solar might be a good strategy. Is that time now?", six bullet points from a GTM article called "Why I Am Short First Solar", and concluding comments from the author about "the potential for a bloody price war" and saying "perhaps" margins can remain strong IF FSLR executes -- I thought that was a little more than just reporting on banker's comments.

    Can you really blame me for saying you "joined the chorus"?

    Travis Hoium

  • Report this Comment On June 29, 2011, at 12:40 PM, Brettze wrote:

    Travis, I agree that First Solar is a well run company but photovolatics are very inefficient in solar energy conversion to electricity. There is much better solar technolgoies still in the laboratories and ready to go. I dont understand why it is taking so long for such technologies like concentrated solar or solar theremal to start hitting the markets . There is one technology that uses Striling engines that run on hot air from the reflection of the parabolic mirrors that resembles huge satellite dishes that point toward the Sun. It is already being marketed. Hey, we already have solar cookers made of reflective alunminium that we can expand toward home heating with similiar pricnicples.. Why we are so tunnel visoined toward kilowatts while we can also convert sunlight directly into BTUs (British Thermal Units) that is powered by heating oil or natural gas generally. This is somehting you ought to start thinking about right outside the box... I think it is too dangerous or risky to keep assuming that we will always make photovoltaics for the sake of making photovolatics forever! This is not going to be true for much longer.. If you want to expand your solar portfolio, you may want to explore things like sun tracking instruments, aluminium reflecting materials, or things like that .. We already are testing solar technolgoies that are 3-4 times more efficient than photovolatics... We are talking about 80% or higher in efficiencies against only 10-20% in photovoltaics.. Ask yourself , why confinie yourself to photovoltaics. Maybe, you think that photovoltaics si the only thing you can trade for the time being... Photovoltaics is not going away or getting obsolete , no, but to start talking about uitility scale build outs... be careful... We may start a few then something better will pop up and take over .. I am a strong believer in aluminiujm or simiilar metals that can reflect sunligiht to concentrate sunlight into powerful , fossil fuel ike capabilites. without any pollution.

  • Report this Comment On June 29, 2011, at 12:49 PM, Brettze wrote:

    What is worse... have you examined those solar attic fans??? Why are they powered with puny 15 watt solar panels? It is not powerful enought to cool down attics ... it is more like 200 watts or bigger needed to get all the superheated air out of the attics under the hot sun.. It will cost $500 or more for bigger solar attic fans that I want to buy only if with tax credits.. Also, what it tells me is that we are not really trying to reduce our dependence on fossil fuels that power our utiilties.. It looks like that those solar attic fans or even porch lights are being used as red herrings in hopes to satisfy our anxieties about our overdependence on fossil fuels.. Utilities really dont want to get big on altenrate energy and are doing everything politically possible with damage controls .. we will probably end up still paying ever higher prices for fossil fuels down the road because we are too tunnel visioned toward inefficient photovoltaics .. Suppose we shift toward solar themral or CSP concnetrate d solar power, we would be better able to reduce our dependence on fossil fuels and also will be able to reduce fossil fuel prices in real dollars down the road... This is something that producers of fossil fuels dont want to see happening at all. come to think oif fossil fuel investors who would never dream of having fossil fuel prices being depressed again anytime.. We are already capable fo doing this with more advanced solar technologies still locked in the laboratories for no reason whatsoever.. Probably, we are mistakenlgy thnking that aluminium prices will go up if we shift toward solar thermal or CSP.. Sure, aluminium prices will go up but remember aluminium is a sustainable metal that we will never run out of , almost.. unlike fossil fuels. that is fast depleting .. Aluminium is almoist infinite and can be used to cover practically the entire Earth and reflecting the most sustainable of all, the Sun!!!!!!!!!!!!!!!!!!!!!!!!!!! i it is not always useful to examine finaincial data, iWe need more data on innovation than just merely numbers !!!!

  • Report this Comment On June 29, 2011, at 12:50 PM, Brettze wrote:

    It is no secret to me that practically everyone is blocked mentally from embracing aluminium for strange reasons ... it is like self denial or self deprivation... What is going on, really? We are really getting crazy or what?

  • Report this Comment On June 29, 2011, at 1:54 PM, Brettze wrote:

    Even Warren Buffet doesnt understand aluminiumn!!!

    OMG!!!!!!!!!!!!!!!!!

  • Report this Comment On July 27, 2012, at 4:00 AM, warterra wrote:

    A year later and apparently they weren't.

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