Times are tough for First Solar (NASDAQ:FSLR). Recent headlines like "First Solar Has Been Facing Cloudy Weather" and "First Solar Reaches 52-week Low" accurately describe the dismal situation for this specialized manufacturer of solar modules. In the past year, First Solar shares have gone nowhere but down in value, and I don't see signs of improvement in the coming weeks.
As much as I believe in alternative energy as a good long-term investment and want to see companies succeed in offering alternatives to fossil fuels, I cannot recommend First Solar as an investment. At least not right now. Currently, First Solar is trading at around $20, significantly down from its price at this time last year.
The entire market for alternative energy has fallen into a pit over the past year. Economic strain in the U.S. and Europe has forced governments to reconsider subsidies that facilitate the sale of expensive investments like solar panels. As a result, and despite rising oil prices, solar energy still remains too expensive without help from government incentives.
The most poignant and disruptive example of this comes from Spain and Germany, two nations which decided to end subsidies for solar energy this year. Without governmental financial help, purchasing and installing solar panels is not economically viable. In other words, a huge market for the solar energy industry has been crippled in a big way, and relevant companies are suffering. For example, the German firm Q Cells, which manufactures solar panels, declared it would be filing for bankruptcy two weeks ago, following a trend of other German companies that are also failing under the policy change. This casts a bad omen over other companies in the same industry, like First Solar.
Signs of struggle can be found in the numbers. Although First Solar grew 8.29% in the fourth quarter of 2011, its inventory rose 164% and accounts receivable grew 174%. This means that First Solar is not efficiently extending credit and moving products, a recipe for some serious strife. As long as these numbers remain so dreary, First Solar will seem too risky for most investors, and coupled with struggles in environmentally friendly countries like Germany, the outlook has no reason to improve quickly.
Competitors in China also spell difficulty. Even though LDK Solar (NYSE:LDK) feels the same strain that all companies in the industry are feeling, it benefits from China's solar-related subsidies, which allow it to sell its product far below market value. Against such a fierce price competition, First Solar stands little chance. Expanding into Asian markets, therefore, might be a lost cause-even in spite of LDK's grim efforts to stay alive in the darkening market of solar power. Consequently, cheap imports might continue to thwart First Solar, even on the home front.
In the midst of all of this negativity, is there any good news to be had? Perhaps. In comparison to other firms in the solar industry, First Solar is still the best bet for companies seeking quality solar energy at the lowest possible price. SunPower (NASDAQ:SPWR) and Trina Solar Limited (NYSE:TSL) both fail to compete strongly against the intellectual property and industry dominance that First Solar possesses. In fact, Sun Power has recently had to cut costs in order to keep itself afloat during in the industry downturn.
Further good news for First Solar came this month from a resolution to a loan problem with the Department of Energy. Earlier this year, a plan by First Solar to begin a 230 megawatt, $1.26 billion project for buyer Exelon (NYSE:EXC) met troubles when federal funding was delayed. Shares fell 10% in February in response to fears that the deal would fall through completely, but this month optimism returned, to some degree, as the $626 million loan processed.
Still, First Solar has a long way to go before it becomes, once again, a reasonable stock to recommend. Just this week, the corporation took action to slow production by closing a German factory and idling Malaysian production lines. Although this action is probably a smart move, it indicates to investors that the company is far from facing financial growth. On the contrary, the contraction of factory production might drive stock prices down even further. I would predict this action to hurt shareholders in the short run, even though it might end up saving First Solar in the long run. While I trust the judgment of First Solar's board of directors, I can't imagine investors responding fondly.
Some believe that First Solar will make a comeback. They believe now is the time to invest, shares being as cheap as they are. After all, it is unlikely that First Solar will go bankrupt, given the size and prominence of the company. What it needs, in order to make significant strides in the energy industry, is innovations that make solar investments more reasonably priced. Until that technology appears, however, solar power will have to depend strongly on subsidies-a business plan that is anything but self-sustaining. Still, the demand for renewable, clean energy is not going away. A price-cutting innovation would, clearly, be the big ticket for the industry to clear out of trouble and for a company like First Solar, or any company theoretically, to ensure growth for years to come.
Environmental consciousness is spreading, especially as fossil fuels become so expensive, and that is a promising proposition for alternative energy. But I don't have the confidence that a comeback is on the horizon for First Solar. Sometime in the years ahead, technological breakthroughs might make a valuable asset out of First Solar. Until that moment comes, however, stay away from this stock. You won't find significant growth in First Solar for some time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.