Last September, I asked whether First Solar (NAS: FSLR) was becoming obsolete, and we may be getting our answer sooner than expected. My theory was that as overall solar system costs fell, the balance of system costs (land, inverters, etc.) would begin taking up more of the cost and therefore put an emphasis on more efficient modules. Since your big limitation in a solar installation is land, I thought falling costs would play into the hands of high-efficiency companies like SunPower (NAS: SPWR) and away from First Solar. The day I wrote the article, shares ended the day at $64.75.

Since then there's been nothing but bad news for First Solar. The company announced a change in management, a shift in strategy, and lower earnings guidance.

Yesterday, when full-year 2011 earnings came out, they were worse than even the lowered guidance had anticipated. Fourth-quarter net sales were down $345 million from the third quarter to $660 million, and the company lost $4.78 per share. Earnings were negatively affected by a goodwill impairment charge for the components business, warranty expenses, and restructuring. We'll get to the red flag that brought up in a minute.

The cost lead evaporates
First Solar used to be the lowest-cost manufacturer by a wide margin. Now, Chinese manufacturers are starting to catch up, and it's showing in First Solar's financials.

First Solar said the cost per watt was $0.73, comparable to the $0.76 cost per watt Canadian Solar (NAS: CSIQ) said it has achieved and close to the $0.94 Trina Solar (NYS: TSL) is making modules at. But even though First Solar increased efficiency to an average of 12.2%, Canadian Solar and Trina Solar are still producing more efficient modules, so First Solar's modules aren't as attractive at the same cost.

Not every manufacturer can match First Solar's costs, but they're quickly catching up. When they do, First Solar is going to need to unleash higher-efficiency modules or risk losing out on even more module sales.

Warranty worry
Between June 2008 and June 2009, First Solar made modules that experienced premature power loss in the field, and the company is paying for the mistakes right now. It posted a $125.8 million loss to add to warranty reserves to pay for replacement of modules and other costs. It doesn't appear that these costs will continue, but it's worth keeping a close eye on.

The sad solar player
Compared with SunPower, which was excited about new products and opportunities in new markets, First Solar's management sounded like a sad puppy on the conference call. Michael Ahearn referenced "draconian measures" when referencing feed-in tariff changes in Germany. Tone isn't always indicative of performance, but in this case it's just another red flag for me.

Lowered expectations
First Solar is planning to idle part of its plant in Germany for up to six months; it's going to delay commissioning its Mesa, Ariz., plant; and it's discontinuing work in Vietnam. Read between the lines, and First Solar doesn't think its manufacturing facilities have much of a future.

Revenue expectations were also revised down to a range of $3.5 billion to $3.8 billion from previous estimates. Profit is still expected to be $3.75 to $4.25 per share in 2012.

What keeps me in the game
As much as I realize the strategic weakness, I can't ignore that First Solar is one of the only profitable solar manufacturers, despite this quarter. First Solar also has a 2.7 GW systems pipeline, which will maintain earnings at a profitable level for the near future and for big-name systems backers such as NRG Energy (NYS: NRG) and MidAmerican Energy. These buyers show the confidence utilities have in First Solar's large-scale plant developments.

If First Solar wanted to make a strategic change to becoming a power-plant developer instead of a module manufacturer, it probably could and still generate a decent profit. But in the meantime, the company will keep bumping along.

If the stock jumps in the coming weeks I may cash out, but I view the downside risk as small enough to hang on to my shares. My much bigger solar bet is on SunPower, but First Solar will stay in the game despite this disappointing quarter.

Interested in reading more about solar stocks? Add your favorite to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

At the time this article was published Fool contributor Travis Hoium owns shares of First Solar and SunPower and manages an account that owns shares of SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Donald Wagner

The solar panels are becoming a smaller part of the total cost. In 2006 the panel was about 60% of the cost, in 2009 about 50%, now it is about 40% and is expected to drop to 35% by the end of the year. Efficiency will be the key to who makes it and who does not. While thin film companies are quickly having serious problems, less efficient silicon solar companies will also have a tough time of it. The CPV companies with their higher efficiencies, can charge more for their panels and still have a lower total cost than the other players. Companies that can have higher efficiency will tend to have better cost metrics. I think the Rainbow Concentrator by Sol Solution show some promise where it separates and concentrates the light with just one lens.

March 08 2012 at 8:11 PM Report abuse rate up rate down Reply

it is the aluminium disease

March 01 2012 at 11:57 AM Report abuse rate up rate down Reply
George N

Well...Actually if I watch the Balance sheet. SPWR can be a candidate for Bankrupt FSLR not. FSLR has more cash than debt and anyway they earn money...SPWR loses money and they have more debt than cash.

March 01 2012 at 3:20 AM Report abuse rate up rate down Reply
George N

Well...Actually if I watch the Balance sheet. SPWR can be a candidate for Bankrupt FSLR not. FSLR has more cash than debt and anyway they earn money...SPWR loses money and they have more debt than cash.

March 01 2012 at 3:20 AM Report abuse rate up rate down Reply