First Solar (NASDAQ:FSLR) was once the best stock in solar but over the past two years the company has fallen behind competitors both in the U.S. and abroad.

SunPower's (NASDAQ:SPWR) high cost, high efficiency panels have suddenly become more reasonable in price, SolarCity has come to dominate the residential solar industry, and Chinese competitors Trina Solar (NYSE: TSL) and Canadian Solar have grown quickly selling inexpensive quality panels.

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These companies have seen outstanding stock gains while First Solar has barely beaten the market so far this year. So, why is First Solar underperforming competitors and what should the stock be worth?

The module business is dying
First Solar once led the solar module industry by a wide margin on cost per watt. That's no longer the case and when you make panels that are less efficient than competitors, cost is your only advantage.

Last quarter, First Solar's panels cost $0.67 per watt, which was only down $0.05 from a year ago, and are only 13% efficient. By comparison, Trina Solar's average sale price per watt was $0.68 and sells modules that are over 15% efficient. SunPower, who was once priced out of the market in places, is making a panel that's 21.5% efficient  and manufacturing panels for less than $1 per watt. If you want to see just how far that puts First Solar behind check out an analysis of how efficiency and costs interact in an article here.

The bottom line is that First Solar's panels are less efficient than competitors and are no longer lower in cost. That's why First Solar can't compete in the residential or commercial markets and why utilization is only at 75% when Trina and SunPower are sold out for the foreseeable future. I see no value at all in First Solar's module business, and, in my opinion, they should get out of thin-film solar as soon as possible.

Systems generate all the value
What First Solar has really become is a world-class systems builder. It had $1.3 billion in revenue in the first six months of this year, and all of it was building systems. So, what value the company has left is in its systems business.

Based on First Solar's recent results and its $7.6 billion I've estimated that a 5% net margin is achievable long-term, or about $0.17 per watt. That's about $380 million in net income already in the backlog with about $130 million coming each year.

If we assume a valuation of 10 times annual net income I would argue that the systems business is worth about $1.3 billion. Depending on how costs and bookings change over the next five years, that value could swing dramatically, but I think that's a good ballpark figure.

Add in the balance sheet
The real value in First Solar stock is on the balance sheet. $1.29 billion in cash and securities are held there along with over $1 billion in deferred project costs from projects that will presumably be sold. The easiest way to look at balance sheet value is simply to take First Solar's stockholder's equity, which is $4.16 billion, up slightly over the past six months if we pull out the company's share offering . This can be seen as a baseline value, which the systems business can be added to.  

What is First Solar stock really worth?
If we add First Solar's balance sheet value of $4.16 billion and its systems value of $1.3 billion I get a total value of $5.46 billion. If we divide that market cap by the 99.4 million shares  outstanding after the GE technology purchase, I get a stock price of $54.93. That's about 39% higher than today's price, but remember that I've assumed full value of stockholder's equity in my calculation, so any write-downs would alter that value.

I think there's upside for First Solar's stock but not as much as there is in other solar companies, simply because of its strategic position. Any number of things could go wrong like: falling backlog, lower competitor prices, and risk associated to First Solar's technology acquisitions to destroy value. The problem is that I don't see a lot of upside risk, it's almost all risk to the downside.

With that said, I've calculated a 39% upside for First Solar and most of that value is in the balance sheet, so it's a lower risk stock than most of the rest of the industry. 

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.