A lot of potential concerns have been raised about First Solar (FLSR) lately, driving the stock off its highs. Several CS readers argue that these concerns are overblown, and one, Neil Sandhu, even sent us some links and commentary backing up his bullish stance.
Three big FLSR concerns are:
- The toxicity of cadmium, a vital ingredient in FSLR’s products
- European subsidy risk
- Increased competition
FSLR’s Cadmium telluride (CdTe) solar cells are not dangerous if properly recycled:
A potential European Union ban of FSLR’s CdTe cells hinges on the toxicity of cadmium. The bull case here is that there is little to no evidence that these cells in fact are a danger to anyone. From The Institute For Environment and Sustainability — Peer Review of Major Published Studies on the Environmental Profile of Cadmium Telluride (CdTe) Photovoltaic (PV Systems):
The overall conclusions of the review process were that environmental risks of CdTe PV are minimal, if materials are recycled and/or end-of-life systems and policies are in place. The emissions produced during the life-cycle of the modules are extremely low, and large scale use of CdTe PV modules does not present any risks to public health and the environment. In addition, recycling of the modules at the end of their useful life would resolve any remaining environmental concern.
How is FSLR’s recycling plan? According to the same agency, fine:
First Solar employs satisfactory industrial hygiene and environmental programs. The transparency of First Solar and the announced offer to take back the modules and recycle them is excellent.
First Solar can weather European subsidy cuts:
First Solar received 91% of its $504 million in revenues from Germany last year. So no wonder investors freaked out when there was chatter about large solar subsidy cuts in Germany. However, legislators reached a compromise, and Germany is not going to significantly waver from its support of solar energy.
Now Spain has become the hotbed of solar concerns as the country revisits its own subsidies. But FSLR has little exposure to the country and reduced support from Spain would mostly serve to hurt their competitors, a potential boon for FSLR.
Furthermore, even if the reduced demand in Germany and Spain isn’t picked up by other European countries, Piper Jaffray sees a bright future for FSLR in the U.S and doesn’t believe the market has priced in the “enormous US market driven demand from utilities regardless of ITC [Investment Tax Credit] expansion…state incentives are all that is required for First Solar.”
Increased competition validates FSLR’s success:
General Electric (GE), Applied Materails (AMAT), and now IBM (IBM) are all making serious efforts to become powerful players in the thin-film solar market First Solar pioneered. However these entrants can be viewed as a validation of First Solar’s superior business model, as well as simply a threat. This is a weak argument: A better one is that First Solar’s focus will allow it to fend off competitors.
Last week, General Electric, as part of their plan to have a $1 billion dollar solar business in 3 years, purchased a majority stake in PrimeStar. PrimeStar is a solar company that manufactures cadmium telluride (CdTe) thin film photovoltaic modules, just like First Solar.
The Applied Materials threat is also weighing on the stock, but many analysts do not see AMAT as an immediate worry for FSLR. Barrons:
In a conversation I had with American Technology Research analyst John Hardy this evening, Hardy, who follows First Solar and SunPower, acknowledged that both stocks were responding to the Applied news, but says he sees no imminent threat.
“Applied’s customers are attempting to make a similar thin film solution to First Solar’s that is applicable to the same end market,” he noted, “But First Solar is producing higher efficiencies than Applied on an R&D basis.” By which he means First Solar’s conversion rate is 10.5%, versus the “mid to high single digits” for the technology that Applied enables, he says. It’s hard to know how to gauge the success of Applied’s customers, furthermore, before they start producing finished product, said Hardy.
Hardy went on, “First Solar has a pretty strong lead at this point. I don’t think in the near to medium term there should be any impact to First Solar’s fundamentals,” from Applied’s advances, he said. Ditto for SunPower.
As IBM enters the market too, one thing is abundantly clear: First Solar is on to something. The company has been developing its technology for a decade, and its focus should be a major asset.
Two other First Solar negatives we’d like to hear smart counter-arguments for:
- Why it’s not a negative that the CEO just dumped half his stock
- How 30X revenue is a sustainable valuation for a manufacturing company