No solar manufacturer relies on the U.S. market as much as First Solar (NASDAQ:FSLR) and that's both a point of strength and weakness for the company. First Solar's U.S. manufacturing and differentiated technology allowed it to escape the tariffs that hit most solar manufacturers in early 2018, which has given it a cost advantage and was one of the big drivers of its stock surge in 2017 and into 2018. 

There are now signs, however, that First Solar's position in the market may be weakened. And with North America (primarily the U.S.) accounting for more than three-quarters of the company's pipeline, there are warning signs for investors

Workers installing First Solar panels on a large solar farm.

Image source: First Solar.

First Solar's bad year in the U.S. 

Let's start with how great the year was for the U.S. solar pipeline overall. According to the U.S. Solar Market Insight report for 2018, 13,200 megawatts (MW) of utility-scale power purchase agreements were signed in 2018 compared to 6,163 MW of installations. The utility-scale pipeline hit its highest-ever point at 25,300 MW in the third quarter of 2018. If the U.S. utility-scale solar industry had a record year in signing new projects, it would make sense that a company focused on the U.S. utility-scale solar industry would have a great year as well. But that wasn't the case. 

First Solar booked a total of 5,600 MW of sales in 2018 (worldwide), down from 7,700 MW in 2017. As U.S. demand grew, developers turned to suppliers other than First Solar. 

I will point out that First Solar ended the year with 10,800 MW of contracted pipeline, but with production expected to be up to 7,400 MW annually by the end of 2019, the company needs to sign more projects annually to stay running at full capacity. 

Check out the latest earnings call transcript for First Solar.

Why investors should be concerned

Right now, it's easy to gloss over any weakness in 2018 as a one-time event. But conditions might not get better for First Solar. Solar tariffs will decline over the next three years until they're eliminated in 2022. On top of that, most manufacturers are increasing production of high-efficiency mono-PERC solar panels that increase the efficiency gap over First Solar and reduce the performance gap that First Solar's thin-film panels normally has in harsh conditions. 

First Solar may find it more difficult to command a premium for solar panels, which is ultimately what's helped industry-leading margins. 

FSLR Gross Profit Margin (TTM) Chart

FSLR Gross Profit Margin (TTM) data by YCharts.

Investors can fall back on First Solar's $2.1 billion of net cash on the balance sheet as a point of strength, but if its solar manufacturing business flounders, the stock may struggle. 

What to watch in 2019

I'm going to watch the pace of First Solar's bookings in 2019 and how the company's margins trend throughout the year. We should see benefits from growing scale of the Series 6 product as the year goes on, but there's also pricing pressure from commodity solar panels. How those forces play against each other will go a long way toward telling us if First Solar will hit the $2.25 to $2.75 per share in earnings management expects in 2019. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.