By John Barker
First Solar (FSLR), a leading designer and manufacturer of thin-film photovoltaic (PV) solar cells that has, so far, outlasted much of its competition. Its cadmium-telluride solar cells, although still cheaper than crystalline-silicon cells, are not as efficient, requiring more solar cells to produce the same wattage output. The company's stock price has declined from an all-time high above $300 in May, 2008, to a current price of around $17. After this precipitous 95% decline, I believe that the stock lacks any sustainable competitive advantages. As with any stock down 95% over a four-year period, its problems are many, but they include i) Chinese oversupply, ii) competing technologies, iii) reduction of government subsidies, and iv) a likely delisting from the S&P 500 (SPY). All negatively affect the company's profitability and ability to raise capital.
The big problem with China
In recent years, Chinese solar companies have flooded the PV market with supply. Their foray into the industry has been so bold, in fact, that some have accused China of selling PV cells and modules at below cost, in order to win market share and drive competitors out of business. Some of First Solar's largest competitors in the last decade, including the now-bankrupt and Nasdaq-delisted companies Evergreen Solar (OTC:ESLRQ) and Energy Conversion Devices (ENERQ.PK), have fallen victim to these price wars and oversupply, whereas their Chinese counterparts, like Yingli (YGE) and Trina Solar (TSL), have emerged as worldwide leaders. As a result of China's concerted effort, the cost of solar modules fell 50% in 2011 alone. In reaction to China's tactics, in March of 2012 the U.S. Department of Commerce imposed tariffs on Chinese-made solar cells and panels. However, with the tariffs only ranging from 3 percent to 5 percent, they won't have any real impact on the ability of U.S. solar companies to compete globally. If the U.S. solar industry is to rebound, much of its rebound will depend on how the government reacts to aggressive pricing tactics, like those used by the Chinese in the last two years.
My technology isn't really better than yours after all
When the cost of silicon was double what it is right now a year or two ago, First Solar was able to make a watt of electricity for about one-half of what it cost the average crystalline-silicon manufacturer to make one. However, with the cost of silicon crashing in the past fifteen months, First Solar can no longer beat its competitors on cost alone. Without this cost advantage, commercial companies looking to add solar panels to a fixed area of space (a rooftop or a parking lot) are not as likely to choose a thin-film manufacturer, such as First Solar. Because First Solar's PV cells are not as efficient as crystalline-silicon in turning sunlight into electricity, they need more panels to produce the same level of output. While this is not an issue for power plant scale projects, it raises the question as to how competitive thin-film companies can be in the commercial arena.
You just can't trust the government
Germany and Spain, the two largest solar energy consuming countries on the planet, have recently cut subsidies to solar electricity generating companies. First Solar, although a U.S.-based company, has manufacturing facilities throughout the world, many of the overseas plants having economic futures that are tied hand-in-hand to the government subsidies of those countries. The cut in German subsidies, for example, has led to the recent announcement that a First Solar plant in the European country will be permanently closed. To combat this, the new Chief Executive Officer has said that it will look to build new power plants in countries where it can compete without subsidies.
It's a simple equation: In the U.S., the subsidies received by solar companies are not large enough to win most users over from standard coal-based power. Less than 10% of electricity generating subsidies in the United States are given to solar companies like First Solar and the large, California-based SunPower (SPWR).
Standard and Poor's doesn't care about the sun
The only standalone requirement to be considered for inclusion in the S&P 500 index is a market capitalization of at least $4 billion. However, this is for new entries only. The actual companies comprising the index at any given time are selected by a committee. If an existing member has a market cap that falls below $4 billion, it is up to the committee to remove and replace the member. The committee likes to have a representative cross-section of the economy represented, and First Solar, with a market cap of around $1.4 billion, is the sole solar play in the index, which has bought it some time.
Regardless, if the stock price continues to languish around current levels or fall further, there will come a time in the not too distant future that the stock will be replaced in the benchmark index. If this happens, S&P 500 Index-based mutual funds will be forced to sell shares of the company. This vast influx of First Solar shares on the market will surely negatively impact stock price and the company's ability to raise capital.
Outlook, a tale of two time periods
For short-term investors, the outlook is decidedly bleak. The expression Don't Try to Catch a Falling Knife became famous for good reason. Short of bold government action that attempts to level the playing field for solar, there is no reason to believe that First Solar is a near-term buy. I believe that the stock could fall another 50% in the current economic climate.
However, for long-term buy-and-hold investors, there is reason for optimism. All early-stage growth industries go through a "shake-out" phase. In this phase, First Solar has had to deal with the Chinese competition, uncertain government policies, the loss of its CEO, and a large-scale recall of product. However, with a new CEO and a new strategic plan in place, investors with a five-year time horizon should consider holding the stock at these levels. New, long-term investors, may want to dollar-cost average their way into the stock in the coming 12 or 24 months, being mindful of the risks involved.