Let me tell you the story of a Wall Street goldmine, its called First Solar, a photo voltaic producer that went public on the Nasdaq
November 16th 2007 with the ticker FSLR. Up until now it has been a stunning generation of wealth, almost $20 Billion created on paper since that $25 close on the first day of trading. Here's what the first four months of trading looked like:
As you can see above (by clicking on the image), the first four months were filled with all the types of firsts the initial shareholders would have hoped for. After a 25% gain on the first day of trading it consolidated near $27.50 for a few months before it's first big breakout in Jan 2007. A few weeks later it's first of many big gaps was created after releasing it's first earnings report. The numbers were obviously fantastic and that gap remains unfilled, maybe justly so.
First Solar produces photovoltaics (solar cells) out of thin films of Cadmium Telluride (CdTe) which is just a semiconductor like Silicon. They essentially just sputter the stuff (CdTe and dopants) onto glass that continuously (I assume) runs through their machines. This makes their solar cells very cheap compared with other technologies because its a high throughput process and the cells are made from cheap materials (thusfar). One unfortunate drawback to the cheapness of their process is very low energy conversion efficiency. Because of their choice of materials and processing method First Solar's cells
convert only 10.5% of sunlight into electricity versus ~20% for most Silicon based solar cells (of course this varies with the time of day and location). That means the FSLR solar panel needs to be twice as big for the same power output as a typical cell on the market. Buildings obviously have a limited amount of roof top space, so the low efficiency of their cells could become a problem for them in the future. What Wall Street has focused on is the cost efficiency and it turns out that "First Solar is contractually bound to reduce price per watt by 6.5% per year and plans to be competitive on an unsubsidized basis with retail electricity by 2010." So they might actually be able to compete with unsubsidized energy in two more years, now thats cool! In the end their products can be characterized as low efficiency but cheap.
They sell these solar cells
mostly in Germany to industrial companies that get
big subsides for using solar energy. Since the subsides are based on power usage only, companies can "profit" the most by going with the cheapest per watt solar cells. And that is currently FSLR but a new technology by
Nanosolar is expected to beat them by a mile on that figure of merit. I don't want to go into details here, but let me say that there is serious competition in this space. Nanosolar says they can make cells for "
less than $.99 per watt" compared with First Solar's
$1.40 per watt, just for example. Nanosolar uses CIGS as their semiconductor which should be more efficient based on the band gap. In fact, many researchers see CIGS as the the best candidate for thin film solar. It still sounds like a decent story, so what has the stock done since those first four months?
The stock has exploded in an orgy of profits for anyone who has owned the stock. After being valued at $1.5B initially the company is now worth over $22B and
they expect sales of less than $1B in 2008! Just for fun, another "energy" company called Chevron (CVX) is worth $186B and had revenues of $201B in the last year. So FSLR is worth 1/10th of CVX, now that is incredible.
Here's the deal, FSLR is going to have a very hard time lowering the cost of their cells because they are based on one of the rarest metals on the planet:
Tellurium. "With an abundance in the Earth's crust even lower than platinum, tellurium is, apart from the precious metals, the rarest stable solid element in the earth's crust. Its abundance in the Earth's crust is 1 to 5
ppb, compared with 5 to 37 ppb for platinum. By comparison, even the rarest of the lanthanides have crustal abundances of 500 ppb." Recently a number of new applications of the mildly toxic metal have been found and its price has been sky rocketing in this commodity boom we are in:
I should note to be fair, "the extreme rarity of tellurium in the Earth's crust is not a reflection of its cosmic abundance" (from
wikipedia). Theres more on the Tellurium situation for FSLR
here.
Anyways, the semiconductor they use, CdTe is only half Tellurium. The other half comes from a less rare but extremely toxic (carcinogic) material:
Cadmium. I work with Cadmium precursors and let me tell you this stuff is bad, bad, bad and we take some pretty extreme safety precautions. "Cadmium is an
occupational hazard associated with industrial processes such as metal plating and the production of nickel-cadmium batteries, pigments, plastics, and other synthetics. The primary route of exposure in industrial settings is inhalation. Inhalation of cadmium-containing fumes can result initially in metal fume fever but may progress to chemical pneumonitis, pulmonary edema, and death." (from
wikipedia) Yikes! And it gets worse, "Cadmium and several cadmium-containing compounds are known carcinogens and
can induce many types of cancer." Yeah, so they picked the most rare material an the most hazardous material and stuck them together!
So of course there are going to be environmental problems with the stuff. "Cadmium is also a potential environmental hazard. Human exposures to environmental cadmium are primarily the result of the burning of fossil fuels and municipal wastes.
[4] However, there have been notable instances of toxicity as the result of long-term exposure to cadmium in contaminated food and water. In the decades following World War II, Japanese mining operations contaminated the
Jinzu River with cadmium and traces of other toxic metals. As a consequence, cadmium accumulated in the rice crops growing along the riverbanks downstream of the mines. The local agricultural communities consuming the contaminated rice developed
Itai-itai disease and renal abnormalities, including proteinuria and
glucosuria.
[5] Cadmium is one of six substances banned by the European Union's
Restriction on Hazardous Substances (RoHS) directive, which bans carcinogens in computers." (from
wikipedia) Did you see that last part, its banned in the EU. How FSLR has gotten around that ban is beyond me, but it sure seems like this could be a problem for them in Germany. There is also the question of whether this technology does more harm than good since the material in these devices are so bad. Its a given that at least some solar panels will crack and break, releasing very nasty materials into the environment.
Theres another issue that I'm looking more carefully into, Tellurium containing compounds are very prone to oxidation. When exposed to air for long periods of time they will degrade significantly. This likely means that FSLR must encase their panels in a very thick insulating material (which I hope they do because of the Cadmium anyways). This insulation adds cost, non-power generating light absorption and is likely to contain some leaks. My guess is that over time the CdTe panels loose efficiency faster than other materials but I need to research this further.
Let me just summarize this here. First Solar has some very series problems ahead between heavy competition, sky rocketing materials costs and regulation of their extremely hazardous products. Meanwhile, Wall Street has tricked the world into thinking that this stock is worth more than twenty times this year's revenues. The stock has become a massive bubble by the speculation of ignorant (and naiive?) investors, even
Cramer loves this stock! I expect this will be one of those greatest shorts of all time and maybe they'll even go out of business in a few years. I'm very bullish on solar energy and I expect most stocks in the sector to do VERY well, but FSLR is inherently flawed based on their material choices. I have marked support levels (and possible targets on the way down) on the weekly chart above in purple, and I would not be surprised at all if that gap at $35 gets filled eventually. First Solar might just be the first solar bubble to pop.
Disclosure: I own FSLR puts
