On April 13, with First Solar (FSLR) trading around $37, I penned a bullish article for Seeking Alpha titled First Solar, Trading Below Book Value, Begins To Shine Again. This article highlighted management's recent bullish special analyst meeting, the company's strong finances, relatively new management team, and the high short interest. The article concluded:
FSLR has more than doubled in the eleven months that Mr. Hughes has been CEO. He and his team are reshaping and refocusing this company. Solar energy appears to be the single best solution to reliance on fossil fuels, so it is on a secular growth path. With the TetraSun acquisition, and with more possibly coming, First Solar has a number of arrows in its quiver. If one or more of these arrows draws blood from short sellers, look out above!
At that time, the most recent data was that there were 16.4 million shares sold short out of about 87.2 M shares outstanding, many of which are closely held. After my article was published, the April 15 data showed an increase in shares sold short, to 18.4 M. Perhaps that high number of shorts in fact led to the extreme nature of the FSLR rally, given the relative paucity of news flow.
On Monday after the close of trading, the company released its Q1 financials. GAAP earnings were 66 cents per share. One of its major projects, Antelope Valley in California, has had operational issues in large part related to excessive creation of dust, and the project is now expected to be completed in Q4 rather than soon. In the April analyst meeting, the company was optimistic regarding sales and earnings to come in 2015, presenting a wide range of possible sales on top of already-booked projects. Today, it disclosed that only a small percentage of potential deals have made it beyond the early stage situation (see earnings presentation, slide 6). One analyst, Ben Schuman of Pacific Crest picked up on this, asking, per the Seeking Alpha transcript:
... what are some key upcoming proof points and then your sustainable market in terms of major project awards or national level tenders in specific geographies that we can be watching over the next few quarters to make sure that the strategy is really on track in terms of bookings rather than early to mid-stage pipeline?
CEO Jim Hughes responded vaguely:
I think frankly, that's the opportunity set that's grown to a level of robustness that there is not one particular project or process that I would point to. I think it's just look at that we are steadily making progress toward that goal on a quarter-by-quarter basis from the broad portfolio. We think we will get contributions from across all of the geographies and contributions across all of the product lines. And there is very few single projects that we're pointing to, there are couple with North America that are of significant size but most of it is pretty broadly distributed and we feel like we have, we're not counting on 100% hit rate against the opportunities that they were chasing. So we don't really, I don't really have specific wins ...
The current quarter is going to have costs from workforce reductions, and there is uncertainty about whether some projects ("assets") in Canada are going to provide revenue in this quarter or in Q3. The Middle East is said to be a definite major market for the solar industry, but First Solar hastens to remind one that the decision-makers there are in no hurry to actually sign a lot of contracts on the dotted line any time soon.
And so it goes. The company may do very well, or it may not. Its TetraSun acquisition that positions First Solar to compete in the polysilicon (dominant) segment of the solar market, such as in the rooftop market, is unproven and will take several years to be material to FSLR's financial results. However, somehow the tone of this earnings release and conference call is discordant with the optimistic tone of last month's analyst meeting.
The short squeeze that I suggested could happen last month may have ended. FSLR needs to stand and deliver. Last month, $37 a share looked promising. Now, with the stock down sharply today but with little or any positive news from the earnings release or conference call, and with some bad news relating to Antelope Valley and perhaps other matters, First Solar has violated the first rule of stock management that I learned in the '90s. They have forgotten to under-promise and over-deliver.
I personally almost never short stocks, and I never short anything outside of a bear market, but FSLR appears vulnerable here even down $4 to below $44. We'll of course have to see, but the analyst event was just too discordant from the quarter and year to make many people outside of the company happy.