First Solar Burns Bright on Short Squeeze

by Dan Burrows | August 2, 2012 11:38 am

Shares in First Solar (NASDAQ:FSLR[1]) burned hot Thursday after the company blew past Wall Street earnings estimates[2] and raised its full-year outlook. It was a welcome sign for investors in the bruised and battered solar-power industry … but the future still is far from bright for these stocks.

First Solar, the world’s biggest maker of thin-film panels for the solar industry, said second-quarter profit jumped 81% on a 80% gain in revenue. Earnings beat analysts’ average estimates by a whopping 71 cents per share.

The stock popped almost 30% in early Thursday trading — but while we don’t want to rain on First Solar’s earnings parade, let’s not get too exuberant either. The company still has a lot to prove, and the latest action in FSLR shares almost certainly is driven by short covering.

First Solar has plunged nearly 90% in the past 52 weeks, and it was off about 55% for the year ahead of the latest earnings. A stock that fetched $115 a year ago now goes for $18 and change, partly because the short sellers have been piling on.

Indeed, the percentage of First Solar’s float sold short stood at more than 55% as of mid-July, according to data from S&P Capital IQ.

That’s insane — 55% is a stunningly high figure. It means that more than half off all the company’s stock trading in the open market was held by people betting that it would fall farther. So when First Solar beat estimates by a mile and raised its forecast, that must have touched off a short squeeze, amplifying Thursday’s gains.

The solar industry has been getting creamed by a supply glut of its own making, as well as all-time low prices for natural gas and a lack of new investment on the part of customers trying to navigate sluggish economic growth.

As things stand now, First Solar is the only one of 17 solar industry companies tracked by Bloomberg reporting a second-quarter profit. But that might only make the company the best of a troubled bunch — and it’s not clear First Solar’s trajectory is sustainable.

At first glance, the results look to bolster the company’s strategic shift toward building solar farms internally, rather than selling panels to developers and distributors.

Cutting out the middle man is a tried-and-true strategy, but it also means First Solar has to fill its pipeline with lots of future projects, all of which must meet accounting criteria to be recognized as revenue — and that’s where it gets tricky.

And even if things go well, this still is going to be a volatile, high-risk stock.

“Forecasting has become increasingly difficult as transparency on when and how much revenue and earnings the company will recognize in any given quarter is not easily available,” writes Hakon Levy, an analyst with DNB Markets who rates First Solar at buy. “We believe this might also result in quite large earnings deviation on a quarterly basis in the future.”

Volatility, lack of visibility and the high number of shorts make First Solar a haven for traders — and heartburn for investors.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. FSLR:
  2. blew past Wall Street earnings estimates:

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