The reaction to this good news was great with a move from around $26 to near $40 in a blink, which I think is a bit much. I just did not like that it happened in one day, though if I had options, I would be crying out of happiness. A move like that makes me worried about what happens if First Solar, Inc. (NASDAQ:FSLR) runs into a road block.
Imagine if the company misses, or even if it just meets. In watching the market recently, I feel like the gap between missing and reporting earnings in-line with expectations is just as bad. My cynicism aside, the boldness of the guidance has me concerned. The fact that the share price knifed up also has me concerned, because a stumble will send this lower than it started.
More power, less space
The most important development is the acquisition of TetraSun, which removes the issue I had with First Solar, Inc. (NASDAQ:FSLR). As a thin film provider, it was only a viable supplier for certain projects. Normally, these are huge projects where space is not an issue, and high temperature is not expected. However, residences have limited roof space and thin film panels are not useful. You need higher efficiency silicon cells like those SunPower Corporation (NASDAQ:SPWR) makes.
I am pretty sure that TetraSun makes polycrystalline silicon PV cells instead of the higher efficiency monocrystalline ones of SunPower Corporation (NASDAQ:SPWR). However, monocrystalline cells are much more expensive to produce, and squeezing out efficiency through other methods is probably the better choice.
The price action on the stock has me concerned, but the acquisition is a great one from a strategic point of view. First Solar, Inc. (NASDAQ:FSLR) has opened up an entire new market for itself with the acquisition of TetraSun. As long as the technology is solid, the company probably has the ability to ramp up production. Innovation is the key acquisition, not the ability of the company to produce more panels. First Solar can build out capacity themselves as they see orders rise. Now, the company can target customers who have to worry about space.
I think this is troubling news for SunPower Corporation (NASDAQ:SPWR), though not necessarily fatal. That could change if First Solar, Inc. (NASDAQ:FSLR) sees major success. First Solar is strong enough to really find success in what used to be SunPower’s stronghold. The minor edge that SunPower has with its different cells might not win it more customers if it needs higher prices to maintain profitability.
Most recent quarterly gross margins for SunPower are 6% versus 27% for First Solar. SunPower probably needs to price its products lower to be competitive. You normally do not see such a divergence in gross margins in exactly the same industry, but the technology each company uses is very different. SunPower’s gross margin has been low since mid 2011, so I do not think it is some anomaly like supply issues.
First Solar’s revenue is rising while SunPower has flat revenue. I focus less on earnings for these companies, because I do not see solar as an established industry. It is an established technology, but the industry is still working through its fair share of problems and lacks a certain stability.
I worry about First Solar, Inc. (NASDAQ:FSLR) because of the steep rise in guidance, but I think it is in a far better position than SunPower. First Solar is going beyond thin film, and now SunPower looks threatened. As a side note, I think thin film will still be important to First Solar, because they are far more resilient and cheaper. They can be curved for flexibility if necessary, and the toxicity is not an unassailable problem. Even now, it would be unlikely that the cadmium telluride would leak out.
Eye for diversity
Solar might look good, but keep your foot in fossil fuels. So consider investing in natural gas with a hint of oil, such as in Linn Energy LLC (NASDAQ:LINE). Solar, for all its potential, is a growing industry and full of risk. Natural gas might be on the rise and be considered in a growth phase, but I think it is far less risky. The reason is that the U.S. needs a reliable domestic energy source and natural gas offers that, plus the kicker of being more environmentally friendly than gasoline.
Natural gas prices are probably in an uptrend, and over the next few years, are most definitely going to rise. Natural gas is still very low, and that is the reason that Linn is entering oil. Linn Energy LLC (NASDAQ:LINE) has a lot of natural gas production, but its recent acquisition of Berry Petroleum means that Linn will be able to extract some more profitable oil. Right now, oil is facing some issues, but I do not expect them to last forever. The main draw of Linn Energy LLC (NASDAQ:LINE) is the 7.6% dividend yield, which it seems committed to maintaining despite some recent problems.
Conclusion
Energy ties all of these stocks together. Energy is one of the most important things on this planet. If we had a source of massive, cheap, and clean energy, the world would probably be a nicer place. California’s water problems could easily be solved by desalinization, if the energy costs were extremely cheap. Play the field with energy, because there is no quick solution.
First Solar, Inc. (NASDAQ:FSLR) is probably the way to go in solar, but the recent rise worries me. If the guidance is too optimistic, and a miss or a downward revision would send the stock crashing. Linn is a solid dividend stock, though there is a risk of collapse if natural gas or oil collapses.
The article Solar Will Remain on Shaky Ground…At Least for Now originally appeared on Fool.com and is written by Nihar Patel.
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