Since mid-April, First Solar, Inc. (NASDAQ:FSLR) stock has been on a tear. Note that the shares have logged an impressive gain of roughly 38%. This has actually been a welcome relief rally for investors in FSLR stock.
After all, the 52-week high in FSLR stock is $51.30, compared to the low $26.56. That’s a considerable gap.
Of course, much of the solar industry has been in a terrible funk for some time. Just look at the various operators whose stocks are in single digits, like Vivint Solar Inc (NYSE:VSLR), Sunrun Inc (NASDAQ:RUN) and SunPower Corporation (NASDAQ:SPWR). There has also been a rash of bankruptcies in the industry. Examples include Suniva, Verengo Solar and Sunedison Inc (OTCMKTS:SUNEQ).
Now it’s true that FSLR stock stands out as the clear-cut leader in the U.S. Yet this may not be enough. In fact, there are considerable issues and challenges. So let’s take a look:
FSLR Stock Issue #1: Technical Factors
Part of the rally in FSLR stock is due to a strong earnings report. In Q1, the company handily beat the Street consensus for the top line by $224 million. And yes, earnings also came in ahead of expectations. While the consensus forecast was for a loss of 13 cents a share, FSLR posted earnings of 25 cents.
But when it comes to FLSR stock, the numbers can be choppy (for example, during the quarter, the company got a one-time gain from the sale of the Moapa project). This helps to explain why analysts were off by so much. For the most part, it’s tough to gauge the core business.
Something else: About 25% of the float is in short positions. In other words, some of the recent bullish move has likely been the result of a big-time short squeeze (this is when short sellers buy back stock to cover their positions). Such a thing is usually is temporary, though.
FSLR Stock Issue #2: Competition
FSLR has to deal with tough rivals, especially those based in China. Often these operators have nice cost advantages as well as government support. Although, it is encouraging that FLSR stock has made strides in reducing its operating costs.
But this may not necessarily matter, at least in the short run. The nagging issue is that there continues to be an oversupply of solar panels on the market. As a result, it will be tough to continue post sustained revenues gains as well as improving margins. In the meantime, utility companies have been developing their own solar platforms, which means less overall demand.
Granted, FSLR stock has been transforming its business model — that is, to become a much broader provider of solar services and components. And while this is probably a good strategy, it will still likely take several years to make an impact.
FSLR Stock Issue #3: Politics
While the Trump administration has gotten off to a rocky start, this should not be solace to investors in FSLR stock. The fact is that the president has tremendous executive powers, such as with subsidies and regulations. Let’s face it, solar is still more costly than conventional sources of energy. So if there is a reduction in federal support, the spending is likely to get squeezed.
There are also key programs, such as the Advanced Research Projects Agency as well as the State Energy Project, that could see severe belt-tightening — or even elimination.
Besides, EPA chief Scott Pruitt is known to be climate change skeptic and has already been aggressive in cutting the red tape for conventional energy companies, such as with permits. All in all, this could result in substantially boosting production, which would make solar’s cost disadvantage even worse.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.