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The Short Thinking Behind First Solar

Jay Yao
November 20, 2013

First Solar (NASDAQ: FSLR) has a short interest of 14%. The short interest is particularly high compared to the short interest for Chinese solar companies such as Trina Solar (NYSE: TSL), which has a short interest of 5%, and Canadian Solar (NASDAQ: CSIQ), which has a short interest of around 7%.

People short for different reasons. Some short for technical reasons while others short for fundamental reasons. I personally do not know why the shorts are short, but below are some conjectures.

High valuation
The valuation for First Solar seems pretty high. The forward price-to-earnings ratio is 18.88 with projected growth over the next five years at negative 9.9%. This means that analysts do not see a lot of profit in First Solar's future, and the company's earnings will likely decrease over time.

Government tax incentive dependence for a commodity industry prone to oversupply
Solar energy itself is a commodity. There is little brand loyalty, and the lowest price per watt often wins. First Solar's margins and demand curve is thus very dependent on the overall solar industry's supply and demand.

Like all other cyclical industries, the solar industry is prone to oversupply. In 2011 and 2012, the solar industry went through a period of massive oversupply due to the rollback in European tax subsidies. Solar stocks fell sharply during that period. There could eventually be another period of oversupply due to a rollback of a major government tax credit or because the Chinese companies will keep on producing solar panels to gain market share even if they lose money. In those scenarios, First Solar's stock will likely suffer. 

First Solar also operates in the utility-scale solar farm market, which has seen spotty demand. The company's backlog fell earlier in the year but has since recovered. This type of spotty demand is not as reassuring as the solar rooftop market demand, which has seen consistently strong growth rates of over 40% year over year. 

Future cadmium telluride vs silicon production costs
First Solar uses cadmium telluride for its panels while ot