The high valuation is justified
First Solar's high valuation is justified because the stock has great potential. The utility market is a $100 billion a year market. First Solar is one of the sector leaders in an industry that could disrupt that market.
Despite the fact that solar is a cyclic commodity prone to oversupply, grid parity will allow solar companies to survive and thrive.
Once solar costs achieve grid parity in most places, First Solar will not be competing against other solar companies. It will be competing against natural gas and coal.
Natural gas prices are actually likely to increase over time as more liquefied natural gas plants are created to export gas. Natural gas is around $15/MMBtu in China and Japan while below $4/MMBtu in the United States.
Real coal prices are likely to go higher as carbon credits become more expensive over time.
Because it is competing against coal and natural gas, First Solar will not be vulnerable to solar panel oversupply as it was in 2011 and 2012.
Cadmium telluride can hold its own against silicon
First Solar is currently making progress with its cadmium telluride efficiency map. Even though its costs may be a a tad higher than silicon producers at $0.59/watt versus Trina Solar's (NYSE:TSL) $0.54 per watt and JinkoSolar's (NYSE:JKS) $0.50 per watt, First Solar is seeing substantial improvements. In the third quarter, its production cost per watt fell 12%.
First Solar is on pace to achieve average conversion efficiency of 14% early next year, which will give it a manufacturing cost of a low $0.50 per watt.
First Solar also has a net cash position of $1 billion. It can buy its way into solar efficiency if necessary.
Shorting in a bull market is dangerous
Shorting in bull markets without a near-term catalyst is very dangerous.
Short squeezes can cause a company's stock to increase to a level where the high stock price helps the company fundamentally by allowing it to issue shares at a high valuation for growth. This phenomena often removes the reason for the shorts to short in the first place.
The best example of this is the short squeeze that occurred with Tesla short sellers in May. Many people doubted that Tesla could execute and survive because manufacturing cars is a notoriously capital-intensive business. Tesla ended up being profitable earlier than expected and a short squeeze ensued. The short squeeze allowed Tesla to raise the capital necessary for growth at far higher valuations.
The bottom line
Warren Buffett once said that time is the friend of the wonderful company and the enemy of the mediocre. I believe the former clearly applies to First Solar. As time goes on and solar cost/watt trends lower, First Solar will see more demand. Eventually when its production cost/watt reaches grid parity for most places, First Solar will see immense demand and growing margins.
The same phenomena should happen to other sector leaders like Trina Solar and JinkoSolar as well. In my opinion, the long-term forecast for solar is still sunny.