First Solar's Future: Bright or Dim?

Solar stocks, along with shares of other alternative energy mediums, are currently being sold as "the next big thing" in the stock market. Whenever a stock or industry is touted as such an investment, be cautious.

One day, solar energy may make up a meaningful proportion of energy generation in this company, however, even with the advances that companies are making, it still makes no economic sense to choose solar over another power medium. Even in a very sunny area like Odessa, Texas, solar panels generate a very unattractive return on investment. According to BP's (BP) website, a 6kW fixture would generate enough power to cover the average home's yearly use (about 9,000 kWh) would cost $49,000.

There are cheaper panels available (from other companies, like First Solar Inc. (FSLR), SunPower Corp.(SPWR), and the others talked about daily by pundits like Jim Cramer), but it's clear that buying panels offers a terrible Return on Investment [ROI]. The 9,000 kWhs per year equates to an energy bill of about $1000-1500, or 2-3% of the original cost. (Sure, panels can be purchased under mortgages and then qualify for tax-deductions, but instead of looking at every loophole, I'm looking at the big picture.)

Now Texas is one of the many states (like my home state of Pennsylvania) that offers little subsidies or refunds for panel purchases. The same panels purchased in Los Gatos, CA would qualify for $9,747 of additional rebates, $12,825 in Beverly Hills, or $23,000 in Albany, NY. In a state like NY, which refunds (what appears to be) about half of the purchase price, the investment is more attractive; however, solar output is also lower, so the ROI may only improve to 4-5%, still rivaled by simple, safe investments like CDs or I-Bonds.

I'm not here to discuss exact costs, but my point is, people (or companies) cannot honestly be motivated by economics, at this point, to purchase solar power fixtures. Secondary motives, like saving polar bears and penguins or electricity security during system-wide blackouts or a requirement (as is the case for CA's energy producers) may influence the decision to buy panels.

I view those general factors as an issue that the entire industry has to face, but First Solar is looking particularly vulnerable.

FSLR is expected to report earnings today, profiting $.47 per share. Analysts predict about $2.53 this year and $5.11 next year - certainly, growth is foreseen. FSLR's future estimates manifest how inflated expectations already are. 2010's earnings estimate is $8.75/share, which would be a multiple of 32 - much higher than many current companies' TTM- or this-year P/Es. That conclusion is also reached by assuming the best-case scenario in many variables, like the price and availability of cadmium tellurium remaining ideal, and new production facilities coming online-as expected.

In a heavily subsidized industry, the end of such subsidies would also be disastrous. That doesn't seem too likely in the U.S., where all three (but especially two) of the prospective presidents are pushing green energy, but in more developed countries, like Germany, who have been subsidizing for years, it looks like there may be an end to help to the industry.

First Solar's panels are made differently than any other company; instead of using the now-more-expensive silicon, they use tellurium. That helps them now, as it lets them offer attractive pricing, but may hurt in the long run; solar-grade silicon is being produced in bigger quantities by more companies as the solar movement is spreading, which should eventually lead to cheaper prices for that raw material. First Solar's tellurium appears to have supply and pricing issues, as is discussed here.

Lastly, insiders have been dumping stock lately. About $100 million of FSLR stock was sold during the past few weeks, mainly by FSLR's CEO. Yes, the sales were under pre-made plans that allowed such sales, but the CEO was not obligated to sell anything. If he though the company was a steal at $285, like the general market seems to think, why would he be letting go of his shares two weeks before earnings? (Insider data is available here.)

My bottom-line conclusion is basically to short FSLR based on common sense. The current share price seems blinded (by the sun?) towards any sense of valuation, and towards potential difficulties. The end of subsidies, a tellurium disruption or price increase, or delay in facilities coming on-line. They may indeed beat estimates and raise guidance, as the solar business is hot right now - but I think rationality can't be ignored much longer. Years of good fortune are baked in to share prices already.

My risk tolerance is high, but I'm still worried by the $50 pop after the last earnings report. However, I'm short FSLR. It has fallen from $285 to $160 before, and I'm hoping that the same increase in rationality causes a similar crash after earnings are reported today.

Disclosure: The author is short FSLR, and a little scared that hype will take over after earnings.

Comments

[mavi027]

(Sure, panels can be purchased under mortgages and then qualify for tax-deductions, but instead of looking at every loophole, I'm looking at the big picture.)

That's just funny. Commercial buildings can get panels put on here in Colorado for about 10% of the cost, after state and federal government incentives. Way to look at the "big picture". Good luck with your "common sense" short.

2008 Apr 29 09:54 AM

[EnergyFinancier]

If you're interested in getting the inside scoop from the top players in solar energy finance, I suggest you attend the Renewable Energy Finance Forum-Wall Street (www.reffwallstreet.com), in NYC, June 18-19. Executives from all the top renewable energy companies will be presenting, such as First Solar, LDK Solar, SEIA, Good Energies, Applied Materials, SunPower, Acciona, BrightSource, Abengoa, Acciona, just to name a few. Last year, 40% of the attendees were CEOs, CFOs or Managing Directors.

2008 Apr 29 10:28 AM

[svosavvy]

Maybe writer has forgotten that oil is also heavily subsidized in this country. Also yes there is a huge p/e premium because they are the sector leader by far, kind of like a google of solar panels. Anyway good luck with that short it will either pay off big or you will pay big.

2008 Apr 29 10:29 AM

[MrMuileh]

Just another short seller trying to talk up your position. The author make some valid points, but there is a lot of underlying bias based on the author's short position.

2008 Apr 29 10:54 AM

[hungryshark]

Dear Mr. Short Seller,

You keep mentioning that the earnings are to be out today April 29th, although the earnings are to be posted tomorrow the 30th instead. What else are you getting wrong?

2008 Apr 29 10:59 AM

[vitamin_j]

Agreed that FSLR is pricey, with a lot "baked in."

But what's with the discussion on solar ROI? You do mention different conditions in different states, but otherwise I have to say you've got some pretty shoddy assumptions. Ever hear of net metering? Peak rates? Subsidies are part of the picture right now, sure, but aren't the only way a system pays you back. What about the life of the system, given that most panels have a 25 year warranty, and that panels made 40 + years ago are still working fine today? Are you assuming that power rates remain fixed? Do you see any value in solar as a hedge against power rate changes? What are the chances solar system owners would get carbon credits they could sell to coal companies under a cap-and-trade system, given that all three presidential candidates support some version of such a system?

Yes, solar might still be impractically expensive in Texas and much of the country, but there are other US markets (California) where it is prudent economic decision today, and still further markets where it will soon be one.

2008 Apr 29 11:07 AM

[Camden]

I agree with the first comment. Stephen, you seem to be using the information that fits your thesis rather than all the information. Why do you assume FSLR's decline in stock price in the first quarter was an "increase in rationality" rather than the result of profit-taking and panic selling in a time of tremendous market turmoil?

Also, you say "it still makes no economic sense to choose solar over another power medium". Answer me this, does it more make economic sense to keep investing in energy sources that are depleting and rapidly increasing in cost per BTU, or ones that are renewable and are rapidly decreasing in cost per BTU? If we don't invest in future technologies we will never have them. Recent history suggests it is likely that First Solar's panels will very soon be priced at or near parity in cost per energy unit with the electric grid. I think it is only common sense to continue to invest in that future.

2008 Apr 29 11:20 AM

[Boruma]

I agree with the general sentiment that Stephen has really thought through his arguments on the true economic cost. However I would also be shy on solar stocks (for now) as with similar sectors which depend on leverage and the availability of bank credit (directly or indirectly). Many of the big commercial schemes which buy PV product are getting stuck now because banks are suddenly tightening terms or simily pulling out deals. I imagine that a similar trend will emerge in the residential market. This negative effect caused by the credit crunch should play out over the next year, possibly longer, and at that point I will reassess my cautious position.

2008 Apr 29 12:13 PM

[Stephen Frankola]

To pretty much every response above:

I don't doubt that solar energy will play an important role in powering the world. I do, however, doubt the current merits of FSLR's valuation.

I regret using the BP statistics, because there are cheaper panels available. However, those statistics do (at least somewhat) represent costs closer to what consumers will pay. First Solar does not market panels to consumers - they are intended for large scale applications.

Steve, I realize that aggressive incentives have made solar practical in some parts of the country; I list the large rebates given in New York as an example.

I also appreciate attacks focusing on age.

The central thesis of the article was that the current market valuation of FSLR is too high. I admit that the growth prospects for FSLR and the industry are high, in light of expensive, declining oil supplies. But as I stated, when a stock is trading at about 50 times next year's earnings and 32 times 2010 earnings, its hard for the price to appreciate further based on rational expectations.

FSLR will probably open at $225 or $350 tomorrow. I don't know who will have the last laugh. Maybe I'll be proven wrong, and they'll raise estimates to $20/share for 2010. Maybe irrationality will drive the price up. But in the solar arena, there are better values to be had, and I would be cautious about going long at this point.

2008 Apr 29 12:16 PM

[Boruma]

CORRECTION: meant to add the word "not" after "has" in the first line

2008 Apr 29 12:17 PM

[Stephen Frankola]

22 billion dollar market cap based on 1.71 billion of sales... next year?

2008 Apr 29 01:00 PM

[craze]

There are a number of serious problems with the analysis presented here, which many other commentators have already noted. One critical point that hasn't been mentioned is that there is a fundamental difference in the value that solar energy adds behind the meter to an energy grid versus large, centralized grid-connected power plants. The author assumed that the retail power price being saved through the production of solar kWh's was 6-9 cents/kWh. The national average is now well above 10 cents/kWh, and in places like California, Texas and New York, residential rates easily exceed 14 cents/kWh. That, however, is just the price paid by consumers. Look at the spot price of power in NY, TX or CA on some of the hottest summer days - days when a blazing sun is pounding rooftops, A/C units are blasting and pushing up demand, and transmission lines are sagging and overloaded. WHOLESALE spot prices paid by utilities to serve their load during peak periods exceed $300-400/MWh (meaning 30-40 cents/kWh) - periods when solar is pushing energy back into the grid, from behind the meter, avoiding the transmission bottlenecks that plague this country. Thus the actual value of having peak power on the grid on the hottest days when the system is a plant failure away from collapse is incredibly high, and this is why utilities and regulators in places like NY and CA are willing to subsidize the up-front cost of installation, because a distributed grid can actually provide very high value for the utility during critical moments during the year when it helps avoid blackouts.
Solar is thus just the beginning of demand-side and behind-the-meter optimization strategies for utility operators.

Seeking Alpha needs to more closely monitor the quality of the articles posted on its site and avoid the proliferation of information like that expressed in this article, which largely comes from a position of ignorance about how energy is used or utilities operate.

2008 Apr 29 06:02 PM

[xz1]

back to the "personal computer" old days, it cost like a "supercomputer", nobody ever expects it is going to be so "cheap" and getting so "personal". how many do you have at home, i have three and not even count the ones I tossed away.

2008 Apr 29 06:27 PM

[Jack Yetiv]

I agree with many of the comments above critical of Mr. Frankola's article.

Just a few comments. First, I completely disagree with Craze's comments that SA should censor poorly written and poorly researched articles. I think the brain trust that constitutes the readership at SA can do a much better job of critiquing articles than SA editors can do in censoring them.

Second, Mr. Frankola uses old numbers in making his case that solar is too expensive. Unfortunately, he is NOT alone, and many people much older than him and who should know much better than he use the same ridiculous $8 to $10/watt for solar.

Third, solar is TODAY cost-competitive with conventional power IF we value ALL costs (including environmental), but many people are not quite used to that, so if one does not take this approach, solar IS more expensive, especially if one's sun resource is poor or if one lives in a state with poor incentives.

Finally, although most of Mr. Frankola's initial discussion was wrong and irrelevant to his final thesis, I COMPLETELY agree with him regarding FSLR's ridiculous stock price for reasons I have expressed in greater detail in my article published 4-24-08 on SA (Further Musings . . .).

Briefly, in my personal view, no stock is worth 100 times 2008 earnings (and I'm assuming earnings of $3 this year, not the consensus view of around $2.50). Second, once poly gets down to $40-50--which I think is likely to occur within 18-24 months--much (if not all) of FSLR's price advantage will disappear. And without a striking pricing advantage (which it clearly has now), FSLR becomes just another solar stock.

Do we have any examples of wonderful companies, doing wonderful things, but which simply failed to meet the ridiculous expectations that were put on them?

Yeah. AAPL, GOOG, SPWR, and STP.

All former high fliers (though none as high as FSLR), all of which reported fine (or more than fine) at their last quarterly announcements, and all of which are substantially below their 12-month highs.

I sure hope FSLR does not disappoint tomorrow because I am holding a TON of TSL (plus options) and a fair bit of STP, but if it does, I won't be shocked. And if it doesn't, it will in the next 2 or 3 quarters.

Disclosure: I am far older than 18, and am not short FSLR.

Jack Yetiv

2008 Apr 29 08:27 PM

[greencapitalist]

this is a shocking article poorly researched and written and i guess seekingalpha is nowadays getting known for those. look at v and ma articles in this website. total crap to say the least those v and ma articles.

fslr has NOTHIGN to do with my roof top. it is big power plants that come in hundreds of megawatts. so.cal and canadian utilties alone are piloting close to 2 gw (the pilot is from 20 to 50mw) each on fslr.

the only company in solar sector to beat the dirty coal power price in 2009 is fslr.

so what if the ceo sells. if he is doing by plan then what's the problem. if the stock tanks to 150 also he has to sell as per pre arranged plan. so what's the big news about it.

tomorrow flsr will give 80 cents per share. expected is 47cents. expect announcements on new hundred megawatts orders from them.

and frank dont cover your short till it reaches 400 in next couple of weeks okay?

2008 Apr 29 09:27 PM

[Ames Tiedeman]

This thing has a valuation that does not hold up. 20 x sales? Come on. It can fall.

2008 Apr 29 09:43 PM

[Andrew Ling]

Mr. Frankola, your risk tolerance is probably high because you don't have much to lose. I don't know anyone with substantial wealth including myself that has ever shorted any stock, let alone this one. I've also never heard of any renowned investors who have built a fortune primarily on shorting stocks. Options and futures, yes but stocks no. Leave shorting to professional day trades looking for a few ticks and to billionaires looking to hedge and minimize risk. The state Lotto has probably made more wealthy individuals than from shorting stocks. Maybe you should give that a try.

2008 Apr 29 09:48 PM

[Stephen Frankola]

Well Jack, I'm glad that you at least seem to (roughly) agree with my conclusion...

2008 Apr 29 09:50 PM

[Andrew Ling]

BTW, the shorts who may or may not have been right last time the stock was at $280 have all disappeared. Typically when a stocks price goes up as FSLR's has recent short interest increases rightly or wrongly. Yet FSLR's short interest has actually been decreasing as people get used to the valuation.

short interest daily volume days to cover
4/15/2008 3,367,817 5,723,195 1.000000
3/31/2008 2,837,420 4,130,981 1.000000
3/14/2008 2,739,593 5,422,561 1.000000
2/29/2008 2,990,775 5,125,587 1.000000
2/15/2008 3,297,304 7,836,434 1.000000
1/31/2008 2,797,210 8,571,926 1.000000
1/15/2008 2,864,144 5,152,465 1.000000
12/31/2007 3,211,976 3,349,538 1.000000
12/14/2007 6,694,072 4,803,766 1.393505
11/30/2007 7,211,171 4,880,855 1.477440
11/15/2007 6,243,647 5,070,728 1.231312
10/31/2007 5,991,271 3,019,707 1.984057
10/15/2007 5,991,492 2,660,295 2.252191
9/28/2007 5,619,191 3,195,216 1.758626
9/14/2007 3,562,261 2,496,180 1.427085
8/15/2007 2,701,487 2,959,008 1.000000
7/13/2007 3,355,712 2,783,997 1.205358
6/15/2007 4,563,173 1,779,744 2.563949
5/15/2007 3,548,055 2,125,631 1.669177
4/13/2007 2,302,800 1,670,706 1.378339

2008 Apr 29 09:52 PM

[Stephen Frankola]

well BWLD's after-hours performance should make up in any losses I incur with the FSLR short tomorrow.

Andrew, there are multiple famous short sellers, such as en.wikipedia.org/wiki/... , and it's a hedge fund and mutual fund tactic. Don't be overwhelmed by "professionals" - why not utilize a tool that professionals do?

2008 Apr 29 10:53 PM