The Solar Industry is one of the most interesting and dynamic industries out there with changes playing out in multiple dimensions. First of all there is the news of bankruptcies and job losses almost every day as the massive solar capacity glut works itself out. Then there is the cacophony of the trade fights between the major countries like China, USA and Europe. In this noise the fundamentals of the solar companies and the industry is being missed by investors who run up and down the stocks based on single news point such as China increasing support or the US imposing duties.
The First Solar (FSLR) stock has seen a dramatic run up in recent times as the company has announced a number of big solar project wins in recent times. Compared to the other solar companies which are making huge losses, First Solar profits in the solar industry have stood out. However investors are missing out on how the fundamentals of the company are deteriorating each quarter. We see the increasing stock price of the company as a great opportunity to either short the company or for a pair trade with a beaten down but fundamentally good solar stock.
Biggest Reason why First Solar is a short
It's the Cost, Stupid - First Solar had a massive cost advantage over other solar companies in 2008 which was almost a difference of 50%. This was mainly due to the high costs of polysilicon which used to make 80% GM for its producers like MEMC (WFR). However that cost disadvantage for crystalline silicon solar panel players has gone away permanently with a massive amount of low cost polysilicon capacity being built in the last few years. Along with the decrease in raw material prices, the processing costs for silicon solar modules have also decreased at a mind boggling rate. From $1.2/watt processing cost in 2009-10, the processing cost for modules has gone down to 47c/watt . That is a 60% decrease in processing cost in 2 years . While First Solar has also managed to decrease costs by about 10% every year, it is far from matching the cost decrease in silicon solar panels. Chinese solar panel costs (Jinko (JKS), Canadian Solar(CSIQ) , Trina Solar (TSL)) have gone down to 60c/watt while First Solar is still stuck at 65c/watt for its lower efficiency solar panels.
Other Reasons Why First Solar is a short
- First Solar can't sell solar panels anymore - First Solar is first and foremost a solar panel seller , but it can't sell its solar panels outside of its inhouse solar system business. The reason is that you can buy higher efficiency silicon panels from Chinese companies at a lower costs. The only places First Solar is selling solar panels in decent numbers is India where muddled up solar policy has given thin film solar panels an advantage. But that won't remain for long as India plans to impose duties on imports of all solar panels ( thin film and silicon alike) .
There is a very strong possibility that it will eventually have to shut down its entire thin film solar capacity sometime in the future. This will lead to billions of dollars in impairments.
- First Solar has no presence in China - First Solar's plan to build a giant 2 GW solar power plant in the city of Ordos,Inner Mongolia in China has been hanging in uncertainty since 2009 .The project was hyped by the Chinese and USA media as the dawn of a new cooperation with the world's two biggest economies in the Green Energy area. However, its already 2013 and there is no sign of any activity. Washington Post has reported that the Inner Mongolian Government has having second thoughts about the building of the plant. Asian countries like Japan and China are notorious for protecting their domestic companies through implicit means. China will be a 7-8 GW market in the next year or so and First Solar will have negligible marketshare. Like the wind turbine companies Vestas, Suzlon and Gamesa , foreign solar companies like Sunpower and First Solar will only get a tidbit. First Solar has also failed to win any big projects in Japan which is the fastest growing big solar market.
- Valuation - First Solar is approaching a market cap of $2.8 billion compared t the biggest Chiense solar companies with equivalent or more solar panel sales of around $300 million. The easiest trade is to buy a basket of the big Chinese majors and short First Solar. The company make look cheap on a EV/Sales, P/E basis but as we very well know the Sales and Earnings in fast moving Technology companies don't take long to disappear
- Warranty and Product Issues - First Solar suffers from chronic problems with warranties and product recalls. It keeps shelling out millions of dollars in one time costs repeatedly. No other big solar panel company suffers from these problems.
- First Solar can't sell to the rooftop solar segment - First Solar's lower efficiency solar panels can't compete in the residential rooftop market. The reason is that the limited space on rooftops require higher efficiency solar panels to make the maximum use of the real estate. As countries shift more and more towards distributed rooftop solar , First Solar will lose out more and more
- Technology Disadvantage - First Solar makes solar panels using Cadmium Tellerium (Cd-Te) thin film solar technology. Most of the other big solar companies use the more mainstream crystalline silicon solar panel technology. Most of the solar equipment makers like Applied Materials, GTAT and Meyer Burgher also research and sell equipment targeted towards the silicon solar panel market. What this means is the R&D dollars spend each year on silicon solar panel is many times more than what is spend on Cd-Te technology. This gives a huge advantage to silicon solar technology to the disadvantage of First Solar . Note other Cd-Te companies like Abound Solar are bankrupt or have given up on the solar energy market (GE)
- First Solar DOE funded huge profitable solar farms are one time only - The biggest reason why First Solar is profitable today is that it won huge solar panel farm projects funded by DOE . These projects have given outsized returns but this profit stream is one time only and will never be repeated . The newer solar farms being built by First Solar have very low profit margins ( ~10-15% GM) . They are also being built in politically risky countries where the returns are not guaranteed. The sole advantage of First Solar is its solar system and development business. However that advantage is being eroded as this business has very low entry barriers as other solar companies like Canadian Solar, Trina Solar have also started to focus on their own solar development arms. The other problem is that solar project development business is a capital intensive ,risky and a low margin business with lumpy revenues. You are better off buying a pure play EPC and construction company like Fluor than First Solar.
It's fashionable to short the solar industry given the dramatic price declines in stock prices. However, the industry will bottom eventually as the prospects of the industry are one of the best in the world. These prospects have led to the current situation of every Tom, Dick and Harry jumping into the industry (think GE (GE), Siemens (SI), LG, Honda (HMC), Saint Gobain ). This had led to a huge churn in the industry as the small and unfocused companies are getting out. Despite the massive losses, the best companies are growing stronger as the competition is forced to downsize or get out.