First Solar (NASDAQ:FSLR) didn't knock anyone's socks off with first-quarter earnings and today investors are punishing the stock. Revenue of $755.2 million was ahead of the $725 million estimate from Wall Street but $0.69 per share in earnings was below the $0.75 estimate and investors sold in bulk this morning.
To be fair, First Solar did reiterate 2013 guidance it gave in April so the thesis hasn't changed overnight. At the time, it didn't give quarterly guidance so analysts just got the timing of earnings wrong. I don't think the miss is worth the 10% drop we're seeing in the stock today, but I also thought the euphoria after guidance in April was overdone as well.
A look into the numbers
There are three things I want to highlight from last night's earnings report. First, backlog dropped another 100 MW during the quarter from 2.6 GW to 2.5 GW. Since First Solar is a systems driven business this is key and doesn't give investors confidence in future earnings. Management did say it has another 5.5 GW of projects in development but they're not booked and backlog is shrinking every quarter, not a good sign for a company that counts on systems.
Second, gross margin dropped to 22.4%, a steady decline from 28.4% in Q3 2012. This margin is in line with what SunPower (NASDAQ:SPWR) reported last week, a huge turn of events for these companies. My investing thesis has long been that SunPower's high efficiency modules would eventually become more valuable as module prices fell, putting pressure on First Solar. That appears to be playing out right now as the companies head in opposite directions.
Finally, module conversion efficiency was flat last quarter at 12.9% and cost per watt was up a penny. Manufacturers have to either improve efficiency or cut costs to survive in solar and First Solar didn't do either one in the quarter. Management expects to exit 2013 with efficiency over 14% but I'd like to see more progress early in the year.
First Solar's one big advantage
I think First Solar is in a tough position with low efficiency modules but it still has a strong balance sheet with $450 million in net cash, which shouldn't be overlooked. Most solar companies are attempting to get into the systems business and their balance sheets will play a role in the financing they can line up.
In China, LDK Solar (OTC:LDKYQ) and Yingli Green Energy (NYSE:YGE) are trying to grow in systems but with billions of dollars in debt and extremely low margins they can't compete with First Solar. So, even their higher-efficiency modules put them behind the curve.
If First Solar is going to stay ahead of SunPower, LDK, and Yingli it will be because of its balance sheet and technology improvements over the next few years. It's a long haul and not a sure bet, but this is still one of the best companies in solar.