First Solar Flourishes

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When I looked at First Solar (Nasdaq: FSLR) this past summer, I had a very difficult time seeing how the firm could justify its P/E multiple of roughly 500. Now, the latest quarterly results have hit me square in the forehead, and just as in a quirky medical drama, I can suddenly see.

Due to a nearly full quarter of production from its new German production facility, First Solar doubled its revenue from the second quarter. As management pointed out, this doesn't establish a linear trend, but there are many more production lines slated for delivery over the next year and a half. By the end of 2009, production will be at around 900 megawatts of annual capacity, more than three times the current rate.

In the quarter, First Solar sold about 64 megawatts' worth of solar modules at $2.48 per watt, more than twice their manufacturing cost. That spread enabled a fat 30% operating margin, which will not be sustained in the future. To reduce dependence on subsidies, the company intends to cut prices in the future. The good news is that First Solar believes it can remain soundly profitable, based on its projected cuts in cost per watt. I don't know that traditional silicon-based competitors like Suntech Power (NYSE: STP) or SunPower (NYSE: SPWR) are nearly as well prepared to wean themselves off government support.

I'm not sure what was more amazing yesterday -- the 34% increase in First Solar's stock price, or the tide that lifted virtually all of its competitors' shares as well. This phenomenon is somewhat baffling. If I were an investor in a rival solar player like Evergreen Solar (Nasdaq: ESLR) or JA Solar (Nasdaq: JASO), First Solar's success would put the fear of the almighty in me.

For my taste, the technology is changing too fast, and solar goes in the "too hard" pile. But it's certainly an important sector to watch as the race toward grid parity heats up.