Why This Analyst is Wrong About First Solar (FSLR)

10 May of 2009 by

first solar building Why This Analyst is Wrong About First Solar (FSLR) 

I read an article Friday morning where Porter Stansberry, of Stansberry & Associates, gave an interviewto The Energy Report. I know Porter, and often enjoy reading hisanalysis. He’s a smart guy and has made a lot of good calls throughouthis career. But Friday morning, I couldn’t help but shake my head whenI read the following question and answer…

The Energy Report: Wehave the big push to go to “green,” non-carbon-based fuel alternatives.But with this abundance of natural gas, why would we expect anyalternatives—solar, biofuels and so on—to take off?

Porter Stansberry: I agree completely. I’ve been shorting solar stocks regularly. For instance, First Solar Inc. (Nasdaq:FSLR)is a fantastic short for several reasons. The dead giveaway is thatFirst Solar makes solar panels only because it gets huge governmentsubsidies to do so. And it sells solar panels only because the peoplewho buy them get huge government subsidies for doing so. Solar energyis not economically practical. First Solar’s technology, in particular,is much less efficient than the newer versions of solar technology, butFirst Solar is the largest of the solar stocks by far in terms ofmarket cap. It’s worth $16 billion right now—which, in my opinion, iscompletely insane. So if you want to talk about alternativeenergy, why would you make the investment in a large amount of solarpanels when you can simply tap into natural gas at very, very low costin most places in the U.S.?

Let’s break this one down, as I must respectively disagree with a couple of points in this analysis…

The dead giveaway is that First Solar makes solar panels only because it gets huge government subsidies to do so.

Itis true that First Solar, as well as any solar company relies heavilyon government subsidies. But what few fail to mention when making thisargument is that ALL forms of energy are subsidized one way or another.

According to an Energy Information Administration (EIA) report,which analyzed federal energy subsidies associated with electricityproduction, energy subsidies and support in FY 2007 came to just over$3.3 billion for coal, about $1.2 billion for nuclear, and $2.1 billionfor natural gas and petroleum liquids. The subsidies identified in thereport focused on direct expenditures, tax expenditures, R&D, andelectricity programs serving targeted categories of electricityconsumers in different regions.

There are also subsidized healthcosts that can be associated with the burning of fossil fuels. Ofcourse, these costs are difficult to accurately quantify, but todisregard them in any analysis would be irresponsible.

If you’regoing to call out the renewable energy industry for being subsidized,then you must call out the entire energy industry for being subsidized.

First Solar’s technology, in particular, is much less efficient than the newer versions of solar technology.

First Solar’s technology boasts efficiencies of just under 11%. For thin-film, this is nothing to shrug off. And we typically don’t count anything that hasn’t been deployed in the field yet, either. Sure, it’s significantly less than the 23.4% that SunPower (Nasdaq:SPWRA) boasts, but you have to be careful when making these comparisons.

Yousee, while First Solar’s thin-film maintains lower efficiencies thantraditional, silicon-based solar, it’s also significantly cheaper. Thiscost advantage favors large-scale installations where you have moreroof space to accommodate more of the less-efficient panels.

Ofcourse, if you’re looking to install solar on your home, then you’dlikely be better off with a company like SunPower. After interviewing anumber of installers, we have found that SunPower is often the panel ofchoice, mostly because of the higher efficiencies the company offers,as well as an easier, and sometimes quicker install.

Now I willcertainly admit that many solar stocks have absolutely soared over thepast few months. When we picked First Solar up at $88 last November, weset an initial price target of $140. Today the stock trades around$190. Is it a case of too much, too fast? Perhaps, which definitelymakes it an excellent target for those wishing to short solar. But forthe sake of long-term sustainability, I wouldn’t disregard a companylike First Solar.

Disclosure: No positions currently held in FSLR or SPWRA.

By Jeff Siegel

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