First Solar Failing to Keep Up in Solar's New World

It's been a wild year for First Solar (NASDAQ: FSLR  ) , which seems to go from industry savior to the solar doghouse every few quarters. Fourth-quarter numbers released last night definitely put the company in investors' doghouse, and for good reason. 

After SunPower (NASDAQ: SPWR  ) crushed fourth quarter earnings expectations and SolarCity (NASDAQ: SCTY  ) demonstrated its ability to grow like crazy, First Solar is stuck in a rut.

Massive utility scale projects have long been First Solar's bread and butter but backlog of these projects is falling. Image courtesy of First Solar.

SunPower and SolarCity are gaining market share because they offer more efficient products, and First Solar just can't yet compete.

Coming up short of expectations
If there's one thing investors hate it's when a company gives guidance and then fails to meet those expectations. First Solar most definitely failed to live up to the full-year 2013 expectations it set at the end of October, as you can see below.

 

2013 Guidance (given 10/31) 

2013 Actual  

Net Sales

$3.4 billion to $3.6 billion

$3.3 billion

Gross Margin

24% to 26%

24.6%

Earnings per Share

$4.25 to $4.50

$4.35

Source: First Solar earnings releases.

Revenue figures can be volatile quarter to quarter, but the fact that management missed its own mark with just two months left in the quarter has investors concerned. The other big flaw to note is a $500 million drop in backlog last year to $7.5 billion. Since First Solar is focused almost entirely on building solar modules it's concerning to see backlog fall, especially in such a strong year for solar.

Distributed solar projects like this one by SolarCity are a major growth engine for the industry, but First Solar is shut out of the market. Image courtesy of SolarCity.

Playing catch-up in solar's hottest markets
The core problem here is that First Solar's modules are far less efficient than silicon competitors and its cost advantage is evaporating. Conversion efficiency for modules was just 13.4% last quarter, compared to 15%-17% for most conventional modules that SolarCity and others are putting up, and well below the 21.5% efficiency for SunPower's X-Series module. 

Cost per watt dropped to $0.56, but that is also only pennies ahead of more efficient Chinese competitors and doesn't make up for the added balance of system costs needed to put up more modules that are less efficient.

First Solar has also basically been shut out of the residential and commercial markets, which are dominated by SolarCity and SunPower. Both companies are installing more efficient panels that lower the cost per kilowatt hour versus First Solar's less efficient modules.

Is First Solar's road map enough?
Management's hope is that efficiency will soon catch up to market demands. First Solar also yesterday announced a 20.4% efficient CdTe cell. The technology that built that cell is already headed to manufacturing plants, and SolarCity hopes that CdTe modules will soon be as efficient as multicrystalline solar modules.

If CdTe doesn't work out, there's the 2013 TetraSun acquisition that promises cells that are 21% efficient at lower costs than Chinese competitors. Word is that commercialization of the new technology will take shape this year, which may again make First Solar an industry savior.

Foolish takeaway
There are a lot of challenges ahead for First Solar, and I don't think it's the best stock in the industry. But let's not forget that it's a highly profitable company and has the flexibility to adapt and adjust as the market changes, something smaller competitors don't have the balance sheet to do. This may not be a huge winner in the long term, but it's not going bankrupt anytime soon and investors shouldn't give up on the stock after one bad quarterly report.

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