First Solar (FSLR) is not afraid of a little competition, even if it is coming from an industrial behemoth. After initial delays, GE (GE) plans to enter First Solar's market in 2013 and compete alongside First Solar, the lowest cost producer of solar modules. GE got its hands into thin-film solar technology by acquiring PrimeStar Solar in 2011. First Solar, the maker of cadmium telluride solar modules, has comfortably commanded most of the market, yet it sees upside in the new rivalry. After several years of a knockout battle among solar technologies, cadmium telluride has been given a huge endorsement. Below, I will explain why the rivalry between First Solar and GE could push both stocks higher next year, making now the best time to buy both stocks.
A ratcheting up of the competition is the push First Solar needs to fortify its market position. If it can best its record of pushing solar cell costs below $1 per watt, the grumbling over China stealing market share in solar gear may soon turn to a whimper. With Chinese solar companies commanding about 70% of US solar installations this year, the forecasted loss of market share may not seem so obvious. Unmistakably, this shift in solar market leadership is already underway.
Sliding gross margins are often an indicator that a company is losing market share to a competitor. In a solar market struggling with overcapacity and supply shortages, First Solar's operational metal stacks up impressively against its Chinese competitors. The solar maker is enjoying gross margins of 27%. China's silicon players, meanwhile, are experiencing a rapid decline. LDK's gross margins have slid to -65.48 from a peak of around 32 in the second quarter of 2011. Suntech Power (STP) and Trina Solar (TSL) margins have followed with drops to 0.59 and 5.79, respectively. In price-to-earnings multiples First Solar has declined but at $10.40 it hovers over its Chinese competitors who are struggling in negative PE territory. Operating margins, at around five, are expected to steadily climb over the next three years.
China's incumbent silicon solar players are struggling with profit margins and cash flows that are being squeezed so tightly some companies are barely hanging in the balance with credit lines. First Solar's stock, in contrast, has been coasting between $20 and $25 on positive revenue and earnings traction backed by a solid project pipeline of new solar module and farm deals. UBS analyst Mahavir Sanghavi however cautions that First Solar will face challenges in emerging markets where competitors are targeting costs of $0.060 per watt versus First Solar's 2012 year end estimate of $0.064 per watt.
This view ignores First Solar's capacity to realize future performance improvements. When the solar market rebounds, cadmium players could engineer a bigger share of the market from the silicon incumbents. First Solar and its cadmium competitors have a two-year window to eke out further cost efficiencies from their patent portfolios. With a healthy product pipeline, First Solar is expected to show consecutive increases in earnings over the next few years. Analysts however forecast an earnings slump for the Chinese silicon players until 2014, according to the consensus view on Yahoo.
In 2013, GE plans to open a $600 million cadmium telluride plant that will produce up to 400 megawatts annually. First Solar produced just over 2 gigawatts in solar modules in 2011. In its initial stages of production, it is unlikely that GE will outperform First Solar's leadership in costs at $0.65 per watt versus about $1.20 a watt for Chinese solar manufacturers, or energy efficiencies for PV cells and modules.
Nonetheless, First Solar is readying for the competition. There are a number of indicators that First Solar, boasting an enviable patent database, is preparing to sharpen its technology edge. Notably, Raffi Garabedian First Solar's former head of disruptive and advanced technologies has replaced David Eaglesham as chief technology officer. Does Garabedian plan to dip into the patent portfolio - 100 patents were filed in 2010 alone - and show GE its technology metal?
The beauty of thin film technology is that it is an open platform for advanced semiconductor materials. While the GE solar executives were on holiday this summer, First Solar filed one of several patents on the use of zinc magnesium oxide in a photovoltaic device. GE has also filed zinc patents. Zinc is a cheap earth metal with comparable properties to the more expensive precious metals used in thin film technologies, such as cadmium telluride and indium phosphide. It is an example of a material that could help First Solar break another cost barrier in solar technology.
First Solar maintains its competitive advantage as a full service solar module shop, from module manufacturing to power plant development and operations and maintenance. This early mover advantage in power systems is important as it moves into the business of developing solar farms and selling excess power to the grid. Expanding from power systems to solar farms will help its already healthy and growing service and maintenance revenues.
The market leader in cadmium telluride appears to be nonplussed by the new competition presented by GE. The developer of the world's largest solar power plant, the 250 MW Agrua Caliente plant in Arizona, has recently repositioned itself as a utility-scale provider, a market in which it will compete with GE. Recent smaller scale activities in India and Thailand signal that it intends to be cost competitive in the developing world. Stockpiling orders, recent power project development announcements include 160 megawatts in Australia and 139 megawatts in California,
Once GE and its powerful global sales force enter the market in 2013, the focus will intensify on technology performance and differentiation. By the time the Chinese producers of silicon modules shore up their balance sheets, they will most likely have ceded some market share.