Why First Solar is a Short at $24

First Solar stock has been on a roll in recent times and has doubled in a short span from its all time lows. This is in sharp contrast to other solar energy stocks especially the big Chinese ones which continue to make new all times lows. Many of the them like JA Solar, LDK, Suntech have become penny stocks as their huge debt burdens are clearly unsustainable. There are rumors that these will be bought over by big Chinese SOEs as the Governments can’t allow the firing of thousands of workers in these companies. So the big question is that if the counter trend in the First Solar stock justified. The current catalyst comes from First Solar announcing a couple of solar project wins in Indonesia and Middle East. My answer to that is a No.

First Solar competitive advantage is getting eroded each day as Chinese companies make stunning cuts in their costs. Chinese crystalline solar panels can be made these days at around 60c/watt which is lower than that of First Solar’s Cd-Te thin film solar panels. This means you can buy a higher efficiency solar panel at a cheaper price than a much lower efficiency thin film panel. First Solar has almost stopped selling its thin film panels outside its own system business. This is due to the fact it can no longer make money. First Solar’s only advantage now is its EPC and development division. So First Solar is an EPC company and should be valued at such. It will soon have to take a massive write-off of its thin film solar manufacturing as crystalline solar panels build on their technological and cost lead over other solar technologies. The company’s $2 billion market cap cannot be sustained for long, given that equally bigger solar panel companies in China like Trina and Yingli can be bought at $300-400 million.

Also note First Solar continues to suffer from chronic warranty and product issues which have already cost it hundreds of millions. While the new strategy of concentrating on emerging markets is letting it win a few solar project. These projects are riskier and have very low returns compared to the US government funded bonanza projects.

List of First Solar Problems

1) First Solar does not have the cost advantage left, plus has a big efficiency disadvantage – First Solar in 2008 had almost a 50% lower cost than comparable crystalline silicon Chinese solar panels. Now there is almost no difference left with both around 70-75c/watt. The cost reduction by polysilicon based solar modules has been far sharper than the Cd-Te modules made by First Solar.

2) Crystalline Silicon Modules are leaving other types of Panels in the Dust – The massive improvements in the cost and efficiency of silicon modules has made other types of solar technology far behind. Solar Thermal Companies have been going bankrupt left and right while most of the other Thin Film Companies are on the deathbed as well.

3) R&D Dollars on Crystalline Modules far Outnumbers that on Cd-Te – The amount of money being spent on R&D by the numerous polycrystalline silicon panel companies and their equipment suppliers is far more than that being spent on Cadmium Tellerium Technology. Most of the dollars spend don’t add up for Cd-Te as well.

4) First Solar emphasis has given up on the residential and commercial rooftop segments – First Solar because of its lower efficiency technology has been forced out of these 2 segments of the market. It now only has the utility market which is also shrinking because governments want to focus on the small rooftop solar installations which are more democratic. See comparison of solar farms and distributed solar roof installations.

5) First Solar hot temperature and recall issues – First Solar panels have issues in hot climates which the company is targeting and its manufacturing issues has already led to a loss in the hundred million dollar range. Both lead to less confidence in the company in a time where there is ferocious competition.

6) First Solar can’t sell standalone panels anymore – First Solar will be selling only about 500 MW of solar panels to customers while selling 1200 MW to its in house system division. The reason being that its solar panels are not competitive anymore. The company will utilize only 60-70% of its capacity in 2012 because its panels cannot compete anymore.

7) Its Marketing, R&D Costs are too high – Chinese engineers and marketers are paid substantially less than that of First Solar’s staff. This was ok when First Solar was earnings 50% GM but now with 20% or below it means First Solar has to fire hundreds or lower salaries by 30-50%. First Solar cannot afford $150,000 scientists or $10 million dollar CEOs.

First Solar is only surviving now because of the DOE funded solar farm deals it has in its kitty. Its change of business model to focus on the utility market is also not much given that it has no cost advantage left and its unique technology is now at a disadvantage over the crystalline technology. The sharp improvements in cost being made in silicon means that First Solar will be at a substantial disadvantage in cost in a commodity industry.

Businessweek

First Solar, Inc. (Nasdaq: FSLR) today announced it has been selected by the Dubai Electricity & Water Authority (DEWA) to construct a 13 megawatt (MW_DC) solar photovoltaic (PV) power plant in Seih Al Dahal, approximately 50 kilometers south of Dubai. Under the terms of the agreement, First Solar will provide engineering, procurement and construction services, as well as its advanced thin-film PV modules. The 13MW solar PV power plant is the first phase of the landmark Mohammad Bin Rashid Al Maktoum Solar Park, named after the leader of the Emirate of Dubai, an AED 12 billion project that is expected to eventually cover 48 square kilometers and produce 1,000MW of clean energy for the nation’s capital using both PV and solar thermal technology.

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