Jack Yetiv

First Solar Sell-Off Is Overdone

I predict that by the beginning of next year, one or more of the integrated Chinese solar manufacturers (eg, TSL, SOL, and/or YGE) will have a cost per watt of panel (INCLUDING their silicon cost) that is within a few percent of FSLR's cost per watt of panel. After ADDING in the extra balance-of-system costs (in essence, after taking into account the fact that you need to build and install TWO FSLR panels to match the power output of ONE high-efficiency poly-based panel, a poly-based installation will actually be CHEAPER than a thin-film installation from FSLR.

This means that FSLR's gross margins, which have traditionally been in the 50%+ range will DROP precipitously, exposing FSLR's stock to a real risk of going to $100 or below ($100 represents a forward PE of 10 to 12 against 2010 projected EPS).

If poly drops below the current $40-60/kg price (and I believe it will), the poly portion of the cost of a panel becomes very small and almost irrelevant. For example, assuming a poly price of $40/kg and 5 gm/watt of poly, the poly cost per watt is 20 cents (this time last year, poly costs per watt were running about $1.75/watt!).

Summary--I believe the upside on FSLR is limited, and downside is at least as likely as upside. I believe SOL and TSL are currently the best bets in the solar space with limited downside (unless the whole market crashes) and a decent prospect of 50% upside in the next 6-12 months. Both SOL and TSL are currently valued at a forward PE of about 10, and both will benefit from the fact that China is going at a breakneck speed to incentivize solar and from the fact that as their costs go down, poly-based Chinese manufacturers will grab more of the market share that FSLR would have had last year.

Jack Yetiv