Flying First Class With First Solar

It's been a bumpy ride, but First Solar (Nasdaq: FSLR) isn't looking to put down the landing gear. That's not to say the company's results have been volatile, but investors' perception of the high-flying company certainly have.

This was the first steady-state quarter in quite some time for the maker of thin-film solar modules. In other words, no production facility got ramped up during the period. The existing seven production lines thus got to strut their stuff, with no start-up costs cutting into operating margins.

It was quite a showing. The annualized capacity of each line improved 11% sequentially, to approximately 44 megawatts. Based on that rate, if all four Malaysian facilities come online by the end of 2009, total capacity will come in at about 1 gigawatt, versus the 900 MW figure the company cited last quarter. A little throughput goes a long way when this sort of enterprise starts to reach scale.

During the quarter, First Solar sold nearly 76 MW of modules at $2.60 per watt, lifting operating margins to 39%. Self-imposed price cuts went into effect the first day of 2008, so margins will fall from this point, because of both pricing and the startup of the first Malaysian plant. That's just the way it goes -- you can't make a massive module omelette without breaking some margin eggs.

During the Q&A session with analysts, management noted a "distinct possibility" of an oversupply of traditional silicon photovoltaic modules at some point in the next two years. If so, folks such as Suntech Power (NYSE: STP), SunPower (NYSE: SPWR), and Trina Solar (NYSE: TSL) would have a tough time. I'm not really convinced that such an oversupply will occur, though. Comments from the likes of REC Group and MEMC Electronic Materials (NYSE: WFR) indicate that there's something of a chasm between announced future polysilicon supply and the amount that is likely to reach the market.

Whatever happens in the silicon story, First Solar's growth trajectory appears to be on track. With conversion efficiencies north of 10%, the company could realistically target the residential market. First Solar simply doesn't have the supply on hand, however. For now, the U.S. utilities market is the next logical step, as renewable-energy requirements ought to begin making these companies receptive to First Solar's wares.

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