Solar power has always been a speculative market. Bulls claim that despite volatility, solar power stocks are sound long-term holdings, as rich developed nations such as Germany, the United States and China make the initially expensive transition from cheaper, dirtier energy sources. In the long run, solar power is expected to save money for a simple reason – it’s free and, depending on location, consistently available year-round. However, emerging markets such as India and Latin America are unlikely to adopt solar power in the near future, since their companies won’t be well-capitalized enough to make the hefty initial investment that solar power requires. First Solar (FSLR: Charts, News, Offers), the second largest solar panel manufacturer by capacity and the first by market cap and profit, has recently been under siege by analysts. Three investment banks – Citigroup (C: Charts, News, Offers), JPMorgan Chase (JPM: Charts, News, Offers) and Maxim Group have all downgraded the stock, expecting smaller competitors, especially from China, to take a sizable bite out of the company’s core business.
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Analysts believe that aggressive competition has lowered solar module prices across the board, in particular from the “$1 per watt” solar panel world which the company has dominated, and margins will soon come under pressure. Current high-priced power purchase agreements (PPAs) are forecast to be replaced by “normalized PPAs” which will lower the cost per kilowatt considerably to 12 cents per kilowatt-hour across the board, due to a widening competitive field.
In addition, crystalline silicon (c-Si), a crucial component in solar panel assembly, has also plunged in price, allowing smaller competitors to close in on First Solar with minimal risk. As such, the barriers to entry – which were high in the past due to expensive silicon – have been lowered considerably. Finally, with economic uncertainty lingering in world markets, subsidies promoting solar power and alternative energy may be reduced or eliminated altogether.
First Solar was one of the first solar power panel manufacturers, which pioneered solar cell production, creating solar farms and making a fanciful green dream a reality. The company’s growth was aided by government subsidies in the United States and the European Union. The company’s weakness, however, is its maturity. Like tech stocks, where the earliest entrants to the field have the oldest technology and newer ones start with cheaper and better technology, First Solar’s thin-film photovoltaic cells are inferior to the polycrystalline cells offered by newer competitors. First Solar’s cells are less power efficient and use more raw materials such as glass and silver to produce the same amount of electricity as a polycrystalline cell. First Solar’s cells also generate less electricity – requiring a thinner, more fragile film to allow better conduction. The company’s cells, however, retain more power and are more responsive in low-light conditions than polycrystalline cells. In addition, the solar power industry accounts for consuming 11% of the world’s silver, a key material for solar cell production. Analysts forecast that silver, which is in the low $30s, is overdue for a rebound and may be headed north of $50, which may sink solar stocks across the board. The company’s main advantage is that it uses less semiconductor material than wafers, which has traditionally given it a pricing advantage. However, wafer prices are in a consistent downtrend, and the company’s inferior cells will soon be priced the same as superior photocrystalline cells.
While Wall Street believes that First Solar was seminal in the solar stock boom, the first one to change the world may also be the first to fall. For example, Garmin (GRMN: Charts, News, Offers) and Palm pioneered the respective GPS and PDA, but their technologies have been completely rendered obsolete by smartphones and other mobile devices. Cutting edge technology is never cyclical, and First Solar may find itself brutally cut out of the loop soon, as younger, hungrier competitors such as Suntech (STP: Charts, News, Offers), Yingli (YGE: Charts, News, Offers) and SunPower (SPWRA: Charts, News, Offers) take down the former king. A pricing war will soon erupt, with margins taking a backseat to solidifying industry dominance, and First Solar will finally be marginalized when General Electric (GE: Charts, News, Offers), Samsung, AU Optronics (AUO: Charts, News, Offers) and Solar Frontier finally stage their inevitable all-out assault.
In early May, First Solar posted earnings of $1.33 per share with flat revenue amid alarmingly rising costs. If $0.10 per kilowatt-hour is to be the new norm, then the company must aggressively cut costs if it hopes to survive. Shares of FSLR currently trade with a forward P/E of 11.42 and a PEG ratio of 0.66. The company does not pay a dividend.
Other News About FSLR
First Solar Rally May Signal Worst Is Over
Is First Solar about to lead solar stocks out of the doldrums?
Has First Solar’s tech expired?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
