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.