Blessed by the Potato

John Hempton just put up a post about why he is short First Solar. I got out of FSLR just a month after getting in, in large part because it had a nice little rally that brought it closer to the upper end of my value range, and also in part because I realized that I have very little idea of their competitor’s economics, and could have been too optimistic in my initial estimates.

His preamble on why technology stocks can flounder in the long term is great. I’ve been looking on and off at RIM: on the one hand, even if they lose market share over time to Apple and Google for smartphones, more and more people are getting smartphones (I might even get one soon!), so it’s a declining share of a market that’s growing rapidly, so absolute growth should still be there. On the other hand, 4 years ago I got my Motorola Razr, and they seemed to be near the top of the cell phone game at the time, yet now are floundering (and similarly, their stock price is down ~50% in that time). Sentiment (especially consumer tastes) can change quickly. Right now people want to surf the net and level their pool tables with their phones, but if the next generation of voice devices is the size of a bluetooth earpiece now, the trend may revert to tiny and voice-only.

As for the specifics to First Solar, I’m kind of neutral on it now, but lean long, so I have some thinking to do on JH’s post. Questions that come to my mind though:

Silicon prices, are they temporarily low, or will First Solar’s edge in pricing disappear? If the low silicon prices are a temporary nadir due to the recession (and many raw material prices crashed last year), then their competitive edge may return. Unfortunately, a quick Google search suggests that the crash in prices was due to the supply-side expanding extremely rapidly and overshooting demand… so low prices will probably stay for a while.

Political risk has always hovered over this company — it (indeed, any solar company) depends pretty heavily on subsidies to make the economics work. However, on the short side, if the US gets serious about greening its grid and starts to introduce subsidies, that could delay declines for a while longer. I had hoped that would be the case when I was long, but still haven’t heard anything about that. Up here in the great white north, our federal rebates are over, and the provincial power purchase subsidies are due to expire shortly, and there hasn’t been word of renewing them.

However, his insight into the new technologies that allow less silicon to be used for wafers (further reducing the cost of the technically superior crystalline panels) may be the killer. The question then is what is the volume capacity in that world, and how long will it take for the crystalline competitors to catch up to take over First Solar’s market?