First Solar (FSLR) just has not caught a break. Its stock has been falling continuously for over one year now, hovering around $13 currently. It is unlikely that it has a break coming its way either, as it will likely continue the free-fall all the way to the bottom. Only one year ago it was priced over $100 and almost exactly four years ago was priced over $300. While previous prices have no bearing on current stock prices, seeing these old prices tells us not only where the company has been, but also where it never will be again.
The main driver of the decrease in its price is the decrease in the price of solar panels in general. The same force that has made it affordable to install solar panels on houses has also led to a decline in profitability for many solar companies, First Solar included. I think this is going to lead to a situation where only the leanest, most efficient companies in the market survive. This is a significantly different market than the one we saw in 2008.
Many analysts share similar sentiment. Apparently, most bulls have left First Solar already, with the average rating a hold. Additionally, the price target on its stock has been downgraded even further, and now represents almost completely stagnant growth. This often signals to shareholders that the company has a flaw in its business model and will need to revamp its processes if it is to remain relevant.
As Bloomberg reported, the largest gap between high and low estimates in the S&P 500 is First Solar, with a gap of 376% of its price. This tells us that analysts are uncertain about the stock and its business model. To some extent, this suggests that analysts are not exactly sure how the company will drive consist returns. I believe this describes First Solar very well. With low cost solar panels littering the market, it will be hard to turn around, especially at the pace expected by today's shareholders.
At least one entity is on First Solar's side, the United States Government. Earlier this month, the United States Commerce Department imposed an anti-dumping tariff on Chinese solar panel manufacturers. Essentially, the dumping argument is that a country floods a market with goods sold below cost in an effort to drive competitors who cannot match these prices out of the industry. To say the least, it is uncertain whether this actually happens.
Regardless, the United States imposed a 31% tariff on Chinese imports of solar panels. Initially, First Solar rallied on this news, only to return to its downward trajectory. The idea is nice, and could really help the company out, but the question remains about its implementation and effectiveness.
Overall, the impression is that this tariff will do nothing to sales of solar panels. A 31% tariff is still well below the drop in price of solar panels, and even at a 31% increase would barely hinder sales. More importantly, Chinese manufacturers apparently could maneuver around the tariffs very easily. In fact, they stated that by merely shipping the materials from China and assembling them in the United States, the tariff would not be imposed. Never doubt entrepreneurial ingenuity.
It should be noted that rival SunPower (SPWR) has seen a decline very similar to First Solar's. However, its decline from the same time last year has been less drastic, possibly signaling that it has found a more stable business model. Or perhaps more importantly, news that Apple (AAPL) purchased its equipment for a solar powered data center from SunPower. News that one has been singled out by Apple to supply it would buoy any stock in any industry. The question is, how long will this last?
Even Chinese solar panel manufacturers have seen stock prices decline rapidly. Competitor Trina Solar Limited's (TSL) stock is now priced at 1/6th of what it was at this time last year. However, the difference is that Trina has some large projects in the pipeline. Specifically, it agreed to build a 2.1 MW project to supply Tibet will solar power. Since Trina has less presence in its local market, expansion into China is a huge development for the company. If it can use this to build economies of scale, it could become the premier solar panel manufacturer.
Another Chinese competitor JinkoSolar Holding (JKS) just announced a plan to be part of a 50MW solar project in Northwestern China. This plan is part of China's overall goal to produce a significant portion of its energy usage through renewable electricity. By choosing JinkoSolar, China may have integrated the company with its overall long-term goals, possibly giving it a boost over the competition.
Additionally, JinkoSolar just announced a new slim, high-efficiency solar panel. The slimmer design will allow the company to ship twice the amount of solar panels than it was previously able to. This might possibly be another way around the impending tariff imposed by the United States government.
A similar announcement came from solar holding company Suntech Power Holding (STP) which announced a new 60-cell solar panel. Similar to JinkoSolar's announcement, this new, slim solar panel will reduce shipping costs by about 25%.
Overall, it looks that First Solar will face increasing innovative competition. However, First Solar does not appear to have any innovation of its own. This will be problematic, as it will continue this decline well into the near future. In fact, many analysts have already written the company off, and it may be best to sell at this point. Of course, there will forever loom the possibility of this company getting back to where it came from, but there are not any indications that will be happening soon, if ever. First Solar has been trading around $14 in recent days. I think the stock will continue to decline slowly, dipping to $12 by late 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.