First Solar: Why I'd Never Go Long

Barron's wrote about First Solar's (FSLR) weaknesses and competitive threats this past weekend (Reuters coverage of Barron's commentary here), and an analyst, FBR Capital Markets, followed up Barron's with a downgrade on Tuesday morning.

The FBR analyst, who slapped an "underperform" rating on FSLR, mused that

recent checks indicate at least one of First Solar's top customers has already switched from First Solar to a silicon-based module vendor for a project that is currently under construction.

The Yahoo! article covering the analyst downgrade elaborated.

Hosseini noted that FBR's meeting with the KfW Bank Group, a Frankfurt-based development bank that lends especially to economic, social and ecological projects internationally, revealed that its year-to-date photovoltaic project backlog has shifted dramatically toward silicon-based modules compared with its 2008 thin-film-focused mix.

I have previously drawn similar conclusions on this blog and on Student Stocks. First Solar is a company that is ALREADY overvalued even before considering the significant, growing competition that they face from both silicon-panel makers and thin-film outfits. Though the share price unfortunately increased after my last article, I made (real) money in the past shorting FSLR from $280 to $140. Though shares have fallen $20 (10%) since the Barron's and FBR pieces, shares still should have plenty of downside room. I tried to short FSLR a few weeks ago (shares were at levels similar to today's price) but none were available.

I continue to dislike FSLR shares at this price, in this environment. I'd never go long, and I will be considering initiating a short position.

Comments

[Growth Stoc...:]

Trailing PE of 31, forward PE of 21, projected to grow at 39%, and you are calling FSLR overvalued?

May 28 05:21 AM

[Jack Lifton:]

First Solar is an excellent example of the difference between science and technology. FS's science is excellent; it makes a high efficiency thin film PV solar cell that is superior to its equivalent silicon cell. Unfortunately, FS's technology is best left in the laboratory due to basic limitations in the availability of tellurium, a key and critical ingredient-one for which their is no effective substitute.This basic flaw in its business model is not none that is even recognized by the investing community. It has now, however, reared its head to bite FS you know where.

I always raise the issues of availability and security of supply whenever I am asked to evaluate the supply chain for a technology. You should look at them also.

May 28 09:09 AM

[Dan Powers:]

In the time period that you shorted FSLR you could have shorted almost any solar stock and made (real) money. That doesn't mean you're wrong about the future for FSLR, just not a good piece of evidence.

May 28 10:35 AM

[Russ124421:]

Get real guys, FSLR is a leader in the segment that will revolutionalise the world within 10 years.
Don't limit your analysis to technologies that are already available in the market. Also, don't think of solar as something that goes on rooftops in California and some countries in Western Europe backed by massive government subsidies.
The real potential is in China, India and Africa. Solar Energy in its development cycle, is where cell phones were in 1990.
Russ

May 28 11:10 AM

[Wisdom vs. ...:]

this article has nothing to do with FSLR's income statement. thin film is extremely inefficient, it costs significantly more to INSATLL per kilowatt. cSi prices have a long way to fall, and they are rapidly. in the log run, MOST LIKELY, thin film will not be able to lower its prices enough to compete with cSi without losing money. so, you can quote FSLR's income statement til you are blue in the face and it will not change the fundamental economics: FSLR is riskier, long term, than cSi companies. this article is documenting the beginning of the most-likely long term trend

May 28 12:42 PM

[Road Runner:]

This author is very gutsy to short a major solar stock when the world is on the edge of the alternative energy revolution with solar leading the way. So what if First Solar loses market share to other solar companies, it still could do very well for a long time because solar is now heading into an "all ships are rising" type of market

Like Jack Lifton says, First Solar does have an Achilles heal with the Tellurium. It is 6x rarer than platinum. But, they may buy or partner with a CIGS company and suddenly be without limit. They did hire a renowned CIGS researcher a few months ago.

Stephen Frankola, Couldn't you find a better sector to find a company to short? There are plenty of sectors that are under tremendous economic pressure, like banking, airlines, auto manufacturing, retail, mall operators, hotels, travel agencies, newspapers, casinos, etc. But, solar?! You are really throwing the dice on this one. I’m not saying that First Solar is going to do well. I’m just saying that you are taking a big risk.

May 28 12:44 PM

[laguna_b:]

Tellurium limited by copper production would be a threat to growth....BUT there are now Tellurium mines with rich veins eliminating this barrier.
Polysilicon pricing is based on low demand and when solar and the economy take off and the slack is taken up, the price will be back up. I am NOT long on FSLR because while I can clerly see excellent margins, you still need 2X of everything other than the panel to service a given solar system based on 10.6% vs. 22% (SPWR) to get the same results. 2X the metal, land, labor etc. In the long run eitehr FSLR has to increase efficiency significantly or the reduction in Si costs will doom them. But that is YEARS away. The author will have long lost his money if he goes short......

May 28 02:39 PM

[Road Runner:]

laguna_b, Can you point us to any articles telling about the Tellurium mines?

May 28 03:04 PM

[Jack Lifton:]

There are no primary tellurium mines in the world.

May 28 06:47 PM

[Windsun33:]

Telluriam and all the other REE's are byproducts of mining other minerals in nearly all cases. There are one or maybe two exceptions in the entire world - and all of them are owned by China. The price of the REE's has been fairly steady up until recently, but because so many of them are used in other "green" products, there is some upward pressure. That means price increases for FSLR and other similar technologies.

Like the author, I stay totally away from FSLR - it is buoyed up and driven by speculation, hype, and hope more than fundamentals. Great stock for day trading, but not for long term.

There are few solar stocks I would invest in at all right now for the long term - they are all very volatile and far too subject to the whims of government subsidies and base material prices.

May 28 11:34 PM

[Mark Anthony:]

Jack:

You are absolutely right. FSLR is confined by the availability of the rare metal tellurium, which is finding more and more extremely important new applications. Thanks to one of your early article, you got me interested in tellurium. I actually purchased some physical tellurium as long term investment:

seekingalpha.com/artic...
seekingalpha.com/artic...

At this point, I am not quote ready to short FSLR, not because FSLR is not an attractive short, but because with so many attractive long investments around, why waste money shorting anything at all?

On May 28 09:09 AM Jack Lifton wrote:

> First Solar is an excellent example of the difference between science
> and technology. FS's science is excellent; it makes a high efficiency
> thin film PV solar cell that is superior to its equivalent silicon
> cell. Unfortunately, FS's technology is best left in the laboratory
> due to basic limitations in the availability of tellurium, a key
> and critical ingredient-one for which their is no effective substitute.This
> basic flaw in its business model is not none that is even recognized
> by the investing community. It has now, however, reared its head
> to bite FS you know where.
>
> I always raise the issues of availability and security of supply
> whenever I am asked to evaluate the supply chain for a technology.
> You should look at them also.

May 29 05:50 PM

[Mark Anthony:]

Jack:

That is not exactly right. There is but ONE primary tellurium mine in the whole world. That mine is located in China:
finance.yahoo.com/news...

But that does not change the basic argument that tellurium supply is extremely limited. I actually took it on me to contact that China mine and the local government to make sure they do not abuse the precious resource. They assured me that they will produce no more than 20 metric tons per year, the government set limit. They really should cut it further down to 10 metric tons a year.

On May 28 06:47 PM Jack Lifton wrote:

> There are no primary tellurium mines in the world.

May 29 06:43 PM

[yellowhoard:]

Mark,

What is your most recent quote on tellruim?

May 29 06:47 PM

[Mark Anthony:]

The price of tellurium is hard to obtain. According to Asian Metal it is currently about $180 per kilogram:

www.asianmetal.cn/Meta...

Long term I have no doubt it will go much much higher, once the tellurium demand on phase change memory, on Blu-Ray DVD and on electrothermal applications pick up.

May 29 07:40 PM

[Road Runner:]

One of the other very cool uses for Tellurium is in thermo-electric materials. These are materials that use the "thermo electric effect" to turn heat directly into electricity. That's right, you could wrap something hot, like a car engine or human body, in a material that could charge a battery. Imagine recharging personal electronics from wearing a vest while walking in the wilderness. I smell the Military.

So there are other very good applications for Tellurium that could compete with First Solar.

May 29 07:44 PM

[Road Runner:]

Here's a good article on the thermoelectric effect using bismuth antimony telluride. www.eetimes.com/showAr...

May 29 07:51 PM

[yellowhoard:]

Great article Road Runner.

Thanks.

May 29 09:50 PM