Barron's: Dark Clouds Over First Solar (FSLR)
Barron's Daily Stock Alert Newsletter came out with a bearish piece on First Solar (NASDAQ: FSLR) today, which suggests that the stock could be setting up for a 30% fall. During today's trading session, FSLR has gained 0.21% to $138.70. Year-to-date, the shares have gained 2.38% and 30% in just the last three months.
First Solar manufactures thin-flim panels, which it sells to solar project developers and system integrators, primarily in Europe. Last year, Germany accounted for 64% of the company's revenue. Much of the demand for the thin-film panels has been driven by government incentives in Europe, which are now being slashed.
Germany has eliminated incentives for ground-based systems; Spain cut incentives by 45%; Italy has proposed cuts of 25%-27%. The ratcheting down of these incentives could hurt revenues going forward.
Barron's also notes that FSLR has a project development arm development arm, which builds solar projects on spec with the goal of selling them once they're completed. This segment of the company now contributes 10% of total revenue.
This is a much riskier business than merely selling components and is also more capital intensive. This has led to reduced margins. In June, gross profit margins fell to 48.3% from 56.7% in the year ago period.
According to Barron's, "While the company typically doesn't find a buyer for the project until it's completed, First Solar recognizes revenue through percentage-of-completion accounting over the life of the project. When a project is 20% completed, the company recognizes 20% of the assumed revenue. The risk is that First Solar won't find a buyer for the project, or that a buyer will pay much less than the company assumes in its revenue models."
FSLR is a very heavily shorted stock, suggesting that the Street is well aware of the risks that face this company. With nearly 20% of FSLR's float sold short, any good news could spark an explosive short covering rally, but bad news will only serve to solidify the bears position.
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