The Debate Grows over First Solar's Big Bets

Companies usually offer investors guidance to help sharpen their outlook over the coming months. But a day after First Solar (s fslr), a leading thin-film solar module maker, spent nearly two hours talking with investors and analysts about its prospects in 2010, the future seemed to be more uncertain than ever.

That’s not First Solar’s fault. The company has a reputation of being transparent and offering conservative guidance. The problem is that there are so many unknowns facing the solar industry next year that no one — not First Solar, its competitors, customers or investors — can say with much certainty what will happen. So while several analysts raised their earnings estimates for First Solar next year, others said there are too many risks right now that keep the stock from being attractive to buyers. It all depends on how you read the scant tea leaves that are available.

One of the biggest questions concerns Germany, which accounted for 77 percent of First Solar’s revenue last quarter. The company has been offering rebates to customers in Germany, which helped push its average selling price down 22 percent year over year last quarter. But because the rebates are determined once a quarter according to market prices for solar goods, they’re nearly impossible to predict.

In addition, Germany is expected to cut back on solar subsidies in 2010. Somewhat paradoxically, this could boost demand in the first half of next year as projects are nailed down ahead of any cuts in subsidies, J.P. Morgan Analyst Christopher Blansett said in a note. For the second half, First Solar says it’s looking to the U.S. and China as well as new markets like India to pick up the slack.

John Hardy, an analyst at Broadpoint AmTech, sees net profit bottoming out in the second quarter of next year and then improving through 2011. First Solar’s addition of eight production lines in 2011 will be “an endorsement of a strong demand environment and robust pipeline,” Hardy said in a note this morning.

Other analysts reacted with a tone that was, if not bearish, then cautious. First Solar said it expects global demand for solar modules to grow at a compound annual growth rate of 35 percent through 2010. Jonathan Dorsheimer of Canaccord Adams said his expectation is for a much more modest 18 percent growth rate in that period.

Dorsheimer argued that First Solar faces risks by expanding its production capacity even as demand remains uncertain. Not only does the expansion pressure down margins — First Solar estimates they will fall to 38 percent next year from 54 percent last year — but the demand that the company is expecting may not emerge.

“The U.S. outlook seems very uncertain, and while there are a lot of headlines out of China, they lack a specific program of implementation,” Dorsheimer said in an interview. “First Solar is an excellent company, and it’s nice to see them stepping up and making this commitment. But there are some things that are difficult to predict. Our view is more cautious, but maybe they’re seeing something we are not.”

The solar industry has been under a cloud of uncertainty for more than a year. The difference now is that companies like First Solar are reacting not by retrenching but by expanding production. That raises the stakes by placing a big bet that customers will emerge to buy the ever-cheaper solar panels. But the question remains wide open for now: If First Solar builds it, will they come?