First Solar's (NASDAQ:FSLR) last earnings report was pretty disappointing. Many solar companies are seeing double-digit revenue growth,  but First Solar is one of the few whose growth has stalled. Is First Solar consigned to be range-bound while the Chinese solar companies take market share? 

First solar earnings
For the fourth quarter, First Solar earned $0.89 per share on $768 million in revenue. That is pretty anemic versus consensus expectations of $0.99 per share profit on $965 million in revenue. Revenue was also down 28.9% year over year. 

Guidance was pretty bad as well, with First Solar expecting earnings of only $0.50 to $0.60 per diluted share on revenues of between $800 to $900 million for the first quarter of 2014. 

Efficiency is key 
At the end of the day, there doesn't seem to be as much demand for utility-scale solar in the near term. First Solar has a capacity utilization of 83% versus many Chinese solar companies that are running at full utilization, which is crimping margins and profit. 

One reason for the under-utilization is that First Solar solar panels are not as efficient as Chinese solar companies. The average conversion efficiency for First Solar modules in fourth quarter was 13.4%. 

This is lower than the average module conversion efficiency of Chinese tier-1 solar companies of 16% and significantly lower than industry-leading SunPower's (NASDAQ:SPWR) X-Series panels, which have a conversion efficiency of 21.5%. 

The relative inefficiency of First Solar's modules is keeping the company away from the current hot area in solar, distributed energy. Distributed energy is currently growing at a very fast rate and investors are bidding up distributed energy companies like SolarCity (NASDAQ:SCTY.DL) and SunPower for their future growth and potential.

Many investors view distributed energy businesses as superior to traditional solar panel makers because distributed energy companies will see their margins increase as solar costs come down. Distributed energy is also insulated from solar panel oversupply, as those companies realize their cash flows from the long-term contracts rather than one-time orders from utility companies.

The bottom line
First Solar needs to improve module conversion efficiency significantly for its stock to get any traction. Improving module conversion efficiency lowers cost per watt and increases gross margins. It increases demand and allows First Solar to potentially compete in the rooftop market where space is very limited.

Improving module conversion efficiency is easier said than done but First Solar did buy TetraSun in April 2013 for that purpose. TetraSun's technology allows for potential conversion of over 21% at relatively low cost. 

So far we haven't heard much about the acquisition since First Solar bought the company. If First Solar does succeed in introducing a highly efficient solar module cost effectively, First Solar stock will have good times ahead. Until that time comes, the company may still see spotty demand and the stock itself will probably be range-bound for the foreseeable future. 

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.