Invest in Solar Power for the Next 30 Years

By Matthew Frankel - November 2, 2012 | Tickers: FSLR, GE, JASO, TSL | 0 Comments

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After the roller-coaster year that First Solar (NASDAQ: FSLR) has had, it may be time to reassess whether or not the company and/or the entire solar industry is even viable.  In full disclosure, I am a big fan of solar as a concept.  However, it remains to be seen if the wide-scale implementation of solar power is economically feasible.  If there is one company that has what it takes to make it work, it is First Solar.

Strengths

First Solar does have some considerable strengths.  First of all, it produces the most efficient PV (Photovoltaic) panels in the world.  The company is constantly breaking its own records in terms of efficiency, and generally announces a new “record” at least once a year. There are enough long-term contracts in place to keep it in business for years, even without any new business.  And with the announced corporate restructuring in April 2012, the company should be able to lower manufacturing costs per Watt and maintain a cost advantage over crystalline silicon solar module manufactures.

Weaknesses

Despite these strengths, there are some considerable weaknesses that investors in First Solar need to be aware of. First, photovoltaic cells have considerably lower efficiency than crystalline silicon peers.  It is a concern to investors of any company when one stockholder has an exceedingly large stake, and in the case of First Solar, a large portion of the company’s stock is held by the estate of John T. Walton, providing the family with a disproportionate amount of control of company operations.  Because solar power is not quite cost-effective enough to compete in a free market, the company is very dependent on government subsidies and contracts in order to be sustainable over the short term, until prices come down.

Opportunities

Despite any potential weaknesses, solar power has some amazing opportunities, especially over the long term.  The world is going to need more and more power as emerging nations develop a middle class, as is happening now in China and India.  According to recent reports, world energy demand is expected to increase fivefold by 2050, from 10TW (Terawatts) today to 50TW.  Solar is the most logical answer to where all of this extra power will come from, as solar has more capability to be implemented on a large scale than other forms of alternative energy (wind, geothermal, “clean” coal, etc.).  Oil refineries are already running at or near capacity, and will not be able to provide all energy needs.  I believe the need for subsidies is a temporary need, as the cost of PV panels has steadily dropped year after year.  In the meantime, governments (and politicians) could become pressured into offering more incentives for clean energy.

Threats

So what are the threats to an investment in solar power, and First Solar in particular?  For one, solar stocks are extremely volatile, and any disruption in the flow of production could be devastating to the stock price.  Look at the 3 year chart of First Solar and it is clear how reactive the stock can be to news.  Remarkably, the company is one of the less volatile solar names!  Always a significant threat to U.S. companies, Chinese manufactures can offer similar products at lower cost (but are being kept at bay for now, due to newly implemented tariffs).  Examples include JA Solar Holdings and Trina Solar (NYSE: TSL).  Trina Solar in particular derives most of its business from outside of China, particularly Europe and the U.S., and is expected by analysts to be adversely affected by the newly imposed tariffs.

There is also the competitive advantage that larger companies have when they decide to delve into solar power.  For example, General Electric (NYSE: GE) is in the process of developing their own solar technologies, and given the amount of financial resources they have, they can be a serious threat when it comes to developing the “next big innovation” first.

Finally, supply of solar panels is currently at an unhealthy level.  First Solar in particular ramped up production in their international manufacturing plants, and when Europe started to pull back its incentives, it left the company with more PV panels in inventory than it could sell.  First Solar’s European business is particularly sensitive to subsidies in Malaysia and Germany, where it operates its plants.

The Bottom Line

Despite all of the threats mentioned above, the solar industry in the U.S. has tremendous opportunities for growth as the world demands more and more power.  First Solar has a specific advantage because they are best-in-breed when it comes to PV panels, with both the most efficient product, and the most ambitious plans to make solar affordable to the masses.

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