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First Solar's Latest Pop Is Just the Beginning

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First Solar (Nasdaq: FSLR  ) seems to have gone from market outcast to the hottest stock in energy in recent weeks. After the company's earnings report earlier this month, the market seems to have found some value in the company's strategy shift and its continued profitability.

The rally hasn't made its way to all solar stocks, though. SunPower (Nasdaq: SPWR  ) is up nicely over the past month, but Chinese leaders Trina Solar (NYSE: TSL  ) , Canadian Solar (Nasdaq: CSIQ  ) , and Yingli Green Energy (NYSE: YGE  ) are all down over the past month.

FSLR Chart

FSLR data by YCharts

I believe this is because investors are starting to understand that the long-term success of companies in solar is more dependent on quality products, vertical integration, and strong balance sheets versus competing primarily on cost. So can First Solar's run continue?

Modules won't drive growth
If First Solar is going to stay in the module business it won't be as a dominant player. Despite increasing conversion efficiency to 12.6% in the last quarter, First Solar is still behind Chinese firms like Canadian Solar and is well below SunPower's industry-leading panels, which exceed 20% efficiency.

As the cost of these more efficient panels fall, the cost difference becomes less meaningful. For example, if an entire installation costs $4 per watt with First Solar panels and installers have the option to install panels that will generate 50% more electricity for $0.15 more, there's no question they would do it. This is why SunPower dominates the residential market and First Solar has a larger hold in the utility-scale market.

Systems are the future
Where First Solar has a clear advantage over competitors is in its systems business. The company has 2.9 GW of systems in its pipeline and a number of well-known partners buying its projects. This ability to build bankable projects is where First Solar's biggest opportunity lies.

It will be able to use its strong balance sheet as a selling point for systems as well. Even when the system is sold, there are warranty and servicing obligations, commitments buyers want to know will be lived up to. First Solar has the history and the balance sheet to meet these obligations.

Will the hot streak end?
We've seen solar stocks rise and fall quickly before, so there's no guarantee the streak won't end tomorrow. But the stock is only trading at 5.6 times the low end of management's 2012 earnings guidance and the company has $744 million of cash on the balance sheet as a cushion.

I think that sets the company up for long-term success for investors willing to buy now and not worry about volatility tomorrow. For more reasons to buy the stock as well as warning signs to watch for, check out our detailed report on the stock. It comes with a year of updates as the market conditions change, and can only be found here.

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

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

Read/Post Comments (4) | 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 August 23, 2012, at 8:10 AM, PerpetualSteve wrote:

    Great article!

    Im at the end of the Solar diving board. Should I jump ?

  • Report this Comment On August 23, 2012, at 11:03 AM, TMFFlushDraw wrote:

    (In full disclosure: I am all-in on SPWR so that's where my money and my mouth meet.)

    If you do jump in, I would say keep a close eye on the industry because it changes by the day. Here are a few things to watch.

    - Gross margins -- In particular watch where they're trending. FSLR and SPWR seem to have stabilized and may be on an uptick, although it's too early to say that's for sure. Chinese companies are all over the board but almost all are at a lower base than those two.

    - Balance sheet -- This is becoming HUGE for manufacturers because things like warranties and service contracts need to be reliable. DO NOT buy a company with billions in short-term debt because it's a ticking time bomb.

    - System cost trajectory -- Understanding how costs are trending for an entire system in countries is very important, as well as watching how countries (and states) are helping or hurting solar. For example, the U.S. is actually doing a lot for solar (CA, NJ, NY, etc.) and the cost is falling rapidly past grid parity in some locations. This will cause a snowball effect when it comes to demand. The same could be said for Japan, India, Saudi Arabia, and others. Meanwhile, Europe is falling apart because of its own budget problems.

    - Efficiency -- First Solar is thin-film, which means it's low efficiency. This means cost is very important and the company will have to compete in only select markets where it can leverage its cost advantage. This is why FSLR has focused on India, the desert Southwest, Saudi Arabia, etc. It can't compete in high-cost areas where efficiency is more important. This is why SPWR basically owns the California residential market, for example, but doesn't do as well in the desert. This will affect strategic position going forward.

    I cover a lot of these things regularly so check back here and you should read other sources as well (Greentech Media, Solar Buzz are good).

    Hope that helps,

    Travis Hoium

  • Report this Comment On August 24, 2012, at 2:42 PM, Tarter539 wrote:

    Systems are priced on a cost per watt basis and proposed based on cost per kw/hr. This means that efficiency is somewhat irrelevant. A watt is a watt. A 50kw/ac Sunpower system will produce exactly what a 50kw/ac First Solar system will produce. The real impact of efficiency is in the amount of space both arrays would require- which is why a Sunpower system makes more sense for a home with limited roof space.

    Too many people misunderstand module efficiency to mean you're getting more production from the "same" system. You're not getting anything cheaper with higher efficiency since theyre priced per watt- you're only going to use less area for that production.

    I think the authors example of the FSLR system vs Sunpower costs is erroneous because it misses this fact.

    The Sunpower system for $4.15 per watt installed isn't going to generate 50% more for $0.15 more- since price per watt already adjusts for efficiency.

  • Report this Comment On August 30, 2012, at 8:47 PM, crcraig52 wrote:

    This post made Thursday, Aug. 30 after big dump by FSLR. Aren't you glad you didn't buy in after reading Travis' article of Aug. 22!!!

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