The Future Is Dimming for First Solar Stock

Not long ago, First Solar (NASDAQ: FSLR  ) was on the top of the solar world. The company's stock price had risen to over $300 per share, net income exceeded $300 million annually, and its cost lead over polysilicon rivals seemed impenetrable.

But when China built too much solar capacity in 2010 and 2011 it became a race to cut costs or die, leaving nothing but the lowest-cost companies in the solar market. This price war eroded gross margins that once topped 50% at First Solar, crushing both profits and share price.

FSLR Chart

FSLR data by YCharts

Can the company turn things around, and is First Solar stock a value or a dud for investors?

Thin-film modules fall further behind
First Solar's thin-film modules once held a comfortable cost lead over the competition. Today, that lead has evaporated and many Chinese manufacturers are manufacturing panels at lower costs than First Solar.

The reason that's of concern is that Chinese polysilicon modules are higher efficiency, meaning installers can pack more power into less space and save costs on installation costs. Trina Solar's (NYSE: TSL  ) multicrystalline panels range from 14.3% conversion efficiency to 16% and Yingli Green Energy's (NYSE: YGE  ) are 14.4%-15.6% efficient. That compares to 13% average conversion efficiency for First Solar; monocrystalline panels are even more efficient.  

The acquisition of General Electric's (NYSE: GE  ) solar business may help a little but GE didn't give up on its own thin-film solar plans for no reason. It saw that it couldn't compete against low-cost Chinese panels with a less efficient solar product. Unless First Solar can increase the pace of cost cutting or rapidly increase efficiency there's simply no reason to keep the module business alive. Even when considering that thin-film performs better in low-light conditions it's not worth the added cost when panels are 10% less efficient than equally priced ones offered by competitors.

First Solar's competitive advantage
Where First Solar still holds a lead is in the project business, but that's a tenuous position right now. The company came into 2013 with 2.6 GW, or $8.0 billion, in project backlog but had just 2.2 GW, or $7.6 billion, in backlog on Aug. 6. It also has had to rely on acquisitions to add to that backlog. In January the company bought a 1.5 GW pipeline of projects from Solar Chile and bought another 1.5 GW pipeline from Element Power earlier this month.

The challenge now is that First Solar dominates in utility-scale solar, but as solar develops it is becoming clearer that residential and commercial solar will be the growth engines in the U.S. and Japan, two of the world's largest markets. There are still opportunities for utility-scale solar but, based on the falling backlog, its momentum is slowing.

Is First Solar stock a buy?
It's hard to argue with First Solar's balance sheet, with $1.3 billion in cash and marketable securities versus $309 million in debt. After generating $168 million in free cash flow last quarter, the stable balance sheet is getting better, for now.

First Solar's problems are more strategic than immediate. Costs for all of its major competitors' modules are falling faster than First Solar's own costs and the company makes a product with inferior efficiency that is only viable in utility-scale projects, not the growing residential and commercial market. I don't think acquiring GE's thin-film technology will make a major difference either.

What is scary for the company is the next generation of polysilicon equipment that will hit the market. Equipment that will allow low-cost manufacturing of 20% or greater efficient panels should be introduced in the next year or two, and then First Solar will fall further behind. The only way to keep up in the panel business would be to build out its TetraSun technology, acquired earlier this year. But that's risky and would cost hundreds of millions of dollars to build at scale.

Foolish bottom line
First Solar is in a weak strategic position and in need of major technology changes just to keep up in the solar panel business. If the company jettisoned its module business and specialized in solar systems the stock could become a value, but not in its current state. I think financials will continue to deteriorate until First Solar realizes that its advantage is in building solar projects, not building the panels that gave it an advantage in the early 2000s. Those days are long gone.

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Read/Post Comments (4) | Recommend This Article (1)

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 20, 2013, at 8:46 PM, Lindy62 wrote:

    Solar Today does not agree with you on the growth in solar. Major growth is in utility scale solar projects in terns of MWs of capacity. Most residential systems are in the 5 to 7 KW size. Look at the projects going in in MD, NC, and CA to name just 3 states. Apple is building a huge system in NC for their data center.

  • Report this Comment On August 20, 2013, at 9:36 PM, speculawyer wrote:

    Both utility scale and residential are big markets. Residential is growing faster right now though as the solar lease has revolutionized the biz. I think solar leasing is stupid . . . take out a 2nd mortgage if you don't have the cash and claim the tax-credit for yourself! But people fall for 'no money down!'.

  • Report this Comment On August 21, 2013, at 9:44 AM, clanza875 wrote:

    Where do you see multicrystalline panels being manufactured at a lower cost than FSLR's thin film panels? They certainly can sell them for less but if they were truly manufacturing for less they wouldnt being showing massive losses for the foreseeable future.

  • Report this Comment On August 22, 2013, at 4:14 PM, jsfb wrote:

    There are a number of things this article fails to mention.

    In April 2013 First Solar came out with 16.1% efficiency modules, faster than any other companies modules, and is projecting that by 2017 that will be increased to 16.4 to 17.1.

    The U.S. put a tariff on all imported Chinese solar panels in 2012 which makes them cost more. Saturation of cheap Chinese solar panels in the U.S. made by cheap Chinese labor was the main reason U.S. solar companies were losing revenue and going out of business. First Solar is a survivor of that, indicating it's management must be doing something right.

    Oh, News Flash! August 2013 First Solar opens residential and commercial solar store in St. Louis, MO.

    They have also sold to residential and commercial in the past but switched to 'utility-scale' solar because of the U.S. saturation of 'cheap' (not more efficient) solar panels from China.

    Also the fundamentals of this company are better than most companies on the stock market.

    First Solar's recent earnings report was actually a positive report with some delayed revenue that would have even made it better.

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