A cloudy future has left First Solar's (Nasdaq: FSLR) first-quarter results looking dim -- with one huge factor primarily responsible for the shadow cast over the company's earnings.

A serious concern
Although First Solar's recent performance has been better than what most analysts expected, it still failed to impress shareholders. Plummeting net sales and increasing production costs tore through First Solar's first-quarter earnings, pushing margins down. The company reported a 33% drop in net income. Even though per-share losses dropped to $1.33 this quarter from $2 a year ago, they're still weighing on investors' confidence.

Why the sudden gloom? Blame Italian governmental authorities for their recent cuts to existing incentives for the solar market, as part of a broader austerity plan. Those measures have worried investors, prompting them to pull money out of solar stocks.

The decline in feed-in tariff, or FiT, programs, which are considered the major reason behind the European solar market boom, have begun to considerably harm First Solar's bottom line.

The Italian government started providing these incentives in 2007, sparking huge investments in the solar market. FiT programs assured operators up to $0.73, or 0.49 euros, per kilowatt hour of produced power for 20 years. This was a great treat for several solar manufacturers, and similar programs sprang up in countries including China, India, and the U.S. But now, with austerity plans in Europe reining in those subsidies, the solar market looks increasingly volatile.

Mambo Italiano
First Solar derives 12%-13% of its sales from the Italian market. However, lower production incentives in Italy may dim demand for solar modules, draining First Solar's overall growth.

First Solar is well known in the photovoltaic industry as the first firm to have achieved the lowest manufacturing cost per watt. However, rising costs shrank First Solar's margins this quarter, leaving the company less able to maintain this standard. And if the company attempts to pass these higher costs on to customers, its sales could suffer as well.

In addition, after the FiT programs debuted several sears ago, a swarm of manufacturers crowded into the Italian solar space, making Italy the second-largest photovoltaic market. This group includes big Chinese solar manufacturers such as Suntech Power (NYSE: STP), Yingli Green Energy (NYSE: YGE), and Trina Solar (NYSE: TSL), which have now become serious competitors for First Solar. By increasing supply, the crowded solar market has also driven down the price of solar cells. Obviously, this saturated sector could weigh on First Solar's future growth.

Amid these concerns, First Solar has begun to try to diversify away from its dependence on Italy and Europe. It's already started expanding its projects in North America with a 290 MW photovoltaic solar power project for NRG Energy (NYSE: NRG), and it's also seeking approvals for two 550 MW projects in California.

The Foolish bottom line
With oil prices soaring amid Middle East unrest and increasing demand from the developing world, solar power may not remain down and out for long.

The European Photovoltaic Industry Association (EPIA) has estimated that the photovoltaic market in Germany and Italy will grow by 3-5 gigawatts this year. The EPIA believes the U.S. photovoltaic market will also expand by 1.5-3 gigawatts in the same time frame.

The future is always uncertain, but one tough quarter doesn't doom First Solar to an eternal struggle. For now, investors should wait and watch from the sidelines rather than jumping into the stock.

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.