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