First Solar Will Lose Fuel Fast

On November 7th, 2007 after the closing bell, First Solar (FSLR) reported earnings for Q3 of financial year 2007. The company's earnings were solid, growing almost ten fold from the previous year to 58 cents per share. Meanwhile, revenue nearly quadrupled to $159 million. It was interesting to note, and the vast difference in net incomes was due to adjustments for stock offerings by the company last year.

Investors cheered the results, sending the already high-flying stock past $200 after-hours, and to levels as high as $230 Thursday morning. Now, this stock was at $20 at IPO, and it has almost gone up 1100% in an year. Talk about a bubble here.

This is the point where greed takes over, and it's exactly what's happening. Agreed that the company forecasted great revenues for the year 2007, but what kind of growth warrants a P/E of 160 (still growing), and a PEG ratio of 6.3? Can the company really keep increasing revenues and income at this rate? I believe its a highly improbable task.

In addition to that, it's not like FSLR is the only solar company that's making solar electric modules. SunPower (SPWR) makes them, and so does China-based Suntech Power (STP), so why should this company trade at such an earth-shattering multiple? The competition is solar space is heating up, and as more and more companies step in, FSLR is sure to lose some of its business. Already STP is ramping up efforts in Germany and other parts of Europe.

With the markets in turmoil and uncertainty lurking around every corner, it would be very naive of investors not to lock in gains at this point. Also, the surge in solar stocks has had to do with oil prices shooting up, but FSLR in particular has risen too much too fast. It is common knowledge that when the markets tumble, the first stocks to get hit are the multi-baggers. Look at Crocs (CROX), Baidu (BIDU), DryShips (DRYS) for examples today and of course, Whole Foods (WFMI) and Hansen (HANS) in the past.

Analysts upgraded the stock, in spite of the 1100% increase in price, and gave it a long-term price target of $230, but the stock reached that level yesterday itself. All these signs of irrational enthusiasm are what cause a bubble, and the signs are clearly showing on FSLR as well. Its a great company with a great business, but anyone who buys a company with such high expectations and astronomical multiples is setting themselves up for disaster.

I shorted at $225, and will cover at $180, which is not too far away.

Disclosure: Author has a short position in FSLR

Comments

[VirtualOptics]

There will be more players in the solar market very soon now that Applied Materials has demonstrated that they can provide equipment to coat thin-film silicon on large glass sheets and bypass the need for silicon wafers. Silicon collectors are more effective than gallium arsenide and AMAT promises to reduce manufacturing costs to under $1 per watt.

[Mark Anthony]

Outrageous FSLR P/E ratio is one thing. But fundamentally this coupany does NOT even have a future where it could growth. They used the wrong technology based on the wrong material on a wrong planet. They use CdTe thin film semiconductor, Cadmium Telluride. Cadmium is extremely toxic and extremely harmful to environment. Tightened environment regulation could shut the business down any time.

The bigger problem is with tellurium supply. FSLR uses 15 grams of CdTe, or 8 grams of tellurium per module. Sounds small? The whole world produces only 215 tons tellurium per year. In the past few years price already gone up from below $4 to over $100 a pound, without any significant CdTe demand yet, implying an extreme shortage. Tellurium is used in military equipments like heat seek missiles, night visition equipments, cooling devices. It's also used in metal alloys, computer flash memories, and DVDs, especially the new Blu-Ray DVD.

FSLR could be killed by either insufficient supply of tellurium, or much higher price of tellurium, or inflation of euro and other currencies. Their sales contracts are on fixed pricing terms. The price can not adjust up for inflation, and must go down 6.5% per year, forcing them to cut cost over time.

Do your research on tellurium.

Full disclose: I am short in FSLR.

[afanofsorts]

I couldn't agree with you more about FSLR loosing steam. In a side note, do you think it is professional for a Seeking Alpha writer running around in Yahoo Finance message boards and screaming "Short this pig" (YGE forum in Yahoo) ?

Be civil or go back to tamilnadu or whatever backwards state you are from in India.

Also, you run this blogger site on the side... should I name it? Next post.

[Love toshort]

I agree with you the solar stocks are overbought, but your logic is way off base. First of all, you cannot even compare FSLR to STP or SPWR. FSLR uses is a non-silicon solar manufacturer, whereas STP and SPWR utilize silicon. So the reason for the higher multiple is because FSLR has the ability to offer their modules at a lower price as a result of not being levered to the price of silicon. This led to huge earnings growth, which was directly reflected in their report, which it appears you didnt listen to. So although you might be right with the direction of FSLR, it would be based purely on luck, and not legitimate reasoning.

Plus, after looking at your blog, your rationale for virtually every pick you have made is out of left field. I respect the fact that you want others to hear what you have to say, but please spare others the misguided advice.

[PrashanthCherukuri]

Dude
Thats what all the experts like you said about HANS, WFMI and NTRI.
Just invest according to your SOUND logic, and we'll see where you'll get with stocks like that.

[Love toshort]

So are you saying that you invest according to UN-sound logic? And why are you bring up HANS, WFMI, and NTRI? Did I ever mention anything about those stocks? My comment was on FSLR. Again, your response is out of left field. My point was that 90% of your stock picks revolve around pure emotion. Keep in mind, I agree with you on the overhype these solar stocks have gotten, but before you make recommendations, make sure you have some objective analysis to back them up.