When First Solar Inc. (NASDAQ: FSLR) reported fourth-quarter earnings after markets closed Thursday, the stock took a dive that continued on in Friday’s regular trading session. The shares were down around 15% in the noon hour.
The solar module maker’s chief U.S.-traded competitors are sharing in the bad news. SunPower Corp. (NASDAQ: SPWR) traded down more than 4%, and Canadian Solar Inc. (NASDAQ: CSIQ) traded down nearly 6%.
First Solar’s fourth-quarter stumble was the result of a $360 million litigation loss that pushed an expected profit into a net loss. That’s not a small loss for a company with about $4 billion in annual revenues, but is it bad enough to give the stock price such a sharp haircut?
Let’s look at what happened to SunPower last November when it announced that it was splitting into two pieces and creating a new Singapore-based manufacturing business to be called Maxeon. Shares dropped by more than 40% over the following two weeks. After a few more weeks bouncing around between $7 and $9 a share, the stock has added 20% since the beginning of the year.
The sin that First Solar committed is the same as the one SunPower committed in November. First Solar is pulling out of the engineering, procurement, and construction (EPC) business. Like SunPower, First Solar got into building solar farms because there was no other choice. There were no EPC firms 10 years ago that could soak up all the solar modules these two firms and their Chinese competitors could produce, so they put together their own EPC businesses.
That vertical integration gave the firms some pricing power at a time when they desperately needed it. Now, there is little reason to be fully vertically integrated. After its split, SunPower will remain as the downstream company focused on projects and Maxeon focuses on upstream production of solar cells.
It’s no secret that companies on the upstream end burn a lot of cash as they attempt to gain scale. In SunPower’s case, the company is selling nearly 30% of its upstream business for $298 million to Taiwanese firm Tainjin Zhonghouan Semiconductor and forming Maxeon to take on the upstream risk related to developing and manufacturing modules.
First Solar now plans to hold on to its technological prowess and get out of the EPC business. Naturally, investors are skittish. Partly that’s due to the fresh experience with SunPower. The lesson may be that now’s a good time to exit, wait for the bottom, and then get back in.
The bigger issue may be that First Solar is holding on to the part of the business that requires the most investment with perhaps the least chance of short-term return. There’s also the risk that the payoff never comes. An EPC firm can source modules from any supplier based on price and availability and get a solar farm built.
Compare this statement from SunPower CEO Tom Werner at the November announcement of the plan to split the company with First Solar’s CEO Mark Widmar’s statement on Thursday’s conference call. Werner first:
We believe that the solar industry is entering a period of extended growth where success will be driven by value chain specialization, technology innovation and economies of scale.
Now Widmar:
First Solar, at its core, is a technology and module manufacturing company. Given the significant evolution of developing utility-scale PV projects in the United States, we believe now is an appropriate time to evaluate our options with respect to our U.S. project development business line.
Widmar’s statement doesn’t have the punchline needed to soothe anxious investors. First Solar’s first-quarter guidance was none too exciting either. Once First Solar figures out what to do with its EPC business and how to communicate it better to investors, the stock is likely to forge a comeback as well.
But Friday was grim. First Solar stock traded down around 15% in the noon hour, at $50.32 in a 52-week range of $49.06 to $69.24. The stock’s 12-month price target is $67.75, but that’s likely to dip once analysts finish reading the tea leaves.
SunPower stock traded down about 5.1%, at $10.14 in a 52-week range of $5.96 to $16.04. The price target on the stock is $9.10.
Canadian Solar shares traded down 5.1% to $22.97, in a 52-week range of $14.50 to $25.89. The price target on the stock is $24.19.
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