First Solar (NASDAQ:FSLR) has been leading the solar industry for more than a decade but it's in a tough strategic position at the moment as the industry shifts into a new growth phase. The company's panels aren't as efficient as rivals and massive project developments that have driven earnings over the past few years are now few and far between.
The company's systems backlog has fallen from $9.4 billion to end 2011 to $8.0 billion after Q1 2013, which isn't a good sign because the company is almost 100% reliant on systems. The high-margin systems that come with projects signed years ago will also likely evaporate as First Solar competes on cost per watt against SunPower (NASDAQ:SPWR), Canadian Solar (NASDAQ:CSIQ), and others. But the biggest challenge is the company's panels.
Falling behind where the growth is
First Solar's product is not as efficient as competitors and now it doesn't have the cost advantage it once had. In fact, many Chinese producers are selling panels for less than the $0.69 per watt First Solar is now producing its panels for. We can debate all day how important efficiency is in solar panels, but when cost per watt is the same a buyer will go with the more efficient panel every time.
The effect can be seen in the growth markets that have driven the industry over the past year. Canadian Solar and SunPower both reported better than expected earnings in the first quarter after seeing strong demand in Japan and the U.S. residential market. These two markets are widely viewed both as great growth markets and consistent performers that won't ebb and flow the way the market in Germany or utility-scale projects have. First Solar has virtually no exposure to either of these markets because efficiency becomes more important as balance of system costs go up and space becomes constrained, like it is in Japan or on a rooftop.
That forced First Solar to buy start-up TetraSun, which has technology it thinks will make high-efficiency panels at similar costs to Chinese panels right now. But this will take millions in investment and comes with technology and industry risk because others will be investing in new technology as well.
Foolish bottom line
There's no doubt that First Solar has one of the best balance sheets with over $1 billion in cash, but strategically its position is faltering. The company can't add enough projects to make up for what it's building and it isn't growing in areas where the market is growing. That leaves this former giant falling behind in the solar industry.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $7 calls on SunPower, long January 2015 $5 calls on SunPower, long January 2015 $15 calls on SunPower, and long January 2015 $25 calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.