Too Close to the Sun? First Solar (FSLR)

Had you bought FSLR at $165 when the market dropped to around 11,800 points in March, you would be up about 60+ % in the space of a month. Whenever I see such a rise, I kick myself for not jumping on it myself. Don’t you? But then I look at what the price represents and what the price is relative to and I’m glad I didn’t. To be honest who wouldn’t want a piece of that 60% gain, but I’m glad I’m watching this one from the side. No matter how thrilling the ride may be, there is just no way that I see First Solar as a good investment at its current price.

The Icarus Effect

When I was young, I thoroughly enjoyed reading Greek mythology and legends. I bring this up because FSLR reminds me of Icarus. Investors are so overjoyed and overconfident that their stock pick is soaring, they forget to heed the warning of flying too close to the sun.

Analysts are judging the stock to be worth something in the high 300’s, and people are just lapping it up without a thought. If analysts could foresee the future, that would be a different story, but the reality is that their estimates have to be SPOT ON for it to be a buying opportunity at its current price. Analysts, like you and me, must predict what might happen and nobody can get everything right all the time.

Alternative Energy! Alright Already!

Since crude oil hit $110 a barrel, emphasis and cries for alternative energy just seems to get louder and louder. It’s on the news in the morning, afternoon and night and people on financial boards are having pitiful girly fights over which one is better and so on.

Well for now, the leading alternative energy is solar with First Solar being the big gun in the sector. Why? FSLR is the low cost provider by utilizing thin film in contrast to silicon used by competitors such as Sunpower, and Wall Street is hooked on this idea. But is it worth a market cap of $23B?

The Discard Pile

After reading a little on FSLR, it didn’t take me long to put it on the discard pile.

The market is pricing it as a $23 Billion company. If you follow efficient market theory, then you probably believe it is worth that much, but a super growth $23 billion company that brought in ONLY $504 million of revenue in 2007 and finished the year by consuming $36.4 million cash is just a cash sucking machine (for the time being) and isn’t worth the additional research.

A look at another $20B semiconductor company, MEMC Electronic Materials, Inc. (WFR) shows that WFR generated $1.9 billion in sales as well as $640 million in owner earnings and is priced at $76. Quite a contrast to FSLR. As investors, we seek something along the lines of, gain $2 for every $1 dollar we invest. Not the other way around.

All Talk no Action

Don’t you think that even growth stocks should offer more compelling results in respect to their worth rather than just offering guidances? To me, it seems like First Solar is more speculation than growth. Even Sunpower, a company less than half the size of First Solar can bring in more revenue, but this is a simplistic and cheap way of comparing companies, but even after looking at some more numbers and details, I wasn’t compelled to research this company any further.

But… First Solar is Growing

Yes, First Solar is growing, but at who’s expense? I prefer to look for companies that can provide results in a tangible form.

Currently, the hype is based on First Solar’s low cost structure and what it COULD earn in the future. But “what if” the forecasted earnings can’t be met? With such a fast growing company requiring so much capital to reinvest into its business, there are too many “what ifs” for people like myself to be considering First Solar as a worthy investment. The intrinsic value + even a high premium doesn’t justify its current price of $291. Give me a piece of Google any day.

Leader in the Market?

First Solar may be the leader by offering the most cost effective product, but in a capitalist country where high profits screams for competition, it won’t be long before others are crowding the market trying to get a piece of the pie. What then? Will First Solar be able to hold off all competition with its low cost manufacturing?

At its current valuation, even the slightest miss in earnings will send the stock tumbling to where it really belongs – i.e. not in the 200’s or even the 100’s.

As much as I don’t like missing out on some huge gains, since it doesn’t even pass the fundamentals of my checklist, I’ll let this train pass by. There are thousands of opportunities out there such as Autodesk and Ceradyne that allows for a safer, predictable and proven ride.

Bottom Line

Alternative energy is a great idea, sector and business opportunity. Rising oil prices the weak dollar and inflation really doesn’t help us either, but there is a value to everything and

Price is what you pay. Value is what you get. – Warren Buffett

Ready to try Old School Value?