Green Tech

First Solar, the fast-growing maker of a type of solar panel that's a big source of debate among those in the clean-tech world, surprised investors again by reporting revenues and earnings that far exceeded expectations, capping a year of unusually strong growth.

The Phoenix-based company, which uses a material whose cost effectiveness is up for debate, said revenues came to $200.8 million for the fourth quarter of 2007 while net income came to $62.9 million, or 77 cents per share. Analysts had expected revenue of $180 million and earnings per share of 53 cents. For the fourth quarter of 2006, the company reported revenue of $52.7 million and $8 million in net income.

As a result, analysts increased their annual estimates for the company. Morgan Stanley's Dave Edwards, for instance, now expects First Solar to report revenue of $981 million for the year and earnings per share of $2.88, up from revenue of $872 million and earnings per share of $2.30.

For the year, revenue came to $504 million, and net income came to $158.4 million. In 2006, revenue hit $135 million (or $23 million less than profit in 2007) while net income came to $4 million.

The company's stock is trading around $223. A year ago, shares of First Solar were hovering around $33. It went public in late 2006 at $20.

First Solar has both fans and detractors. It is arguably the first thin-film solar panel maker to hit it big. Although it was formally launched in 1999, its technology stretches back to the '80s.

The long gestation period has enabled it to fine-tune its manufacturing processes, a key in the solar world. Rather than work with silicon or copper indium gallium selenide (CIGS), it makes its solar panels from cadmium telluride.

Cadmium telluride solar cells aren't as efficient as silicon ones, but they are cheaper. And, unlike CIGS, cadmium telluride solar cells are in the market. First Solar's management has also landed long-term contracts with suppliers and laid out a road map that will lead to a fairly steady expansion of production capacity.

Detractors, though, assert that the company could be hurt by limited supplies of raw materials in the future and increased competition. Additionally, most of the company's sales have been in Germany, which provides sizable subsidies. The stock is also trading at a high multiple of earnings. (When we dubbed the company the Google of solar, armchair experts poo-poohed it.) But despite the predictions, the company has continued to outsell even the optimistic projections.

Morgan Stanley put a price target of $275 in 2012 on the stock, while pointing out bear and bull scenarios that could take it to $125 or $400, respectively.

The big questions for the future are whether the competitors can match First Solar in manufacturing and how well it can do in expanding overseas.

First Solar, which makes cadmium-telluride solar cells, is having one of those years that corporate managers and investors dream about.

Revenues more than tripled in the third quarter to $159 million from a year ago while profits rose to $46 million, or about ten times what they were the year before. Plant expansion is occurring rapidly and the company's stock has gone from $20 to over $200 in a year. The stock price seems vastly inflated when you look at traditional price-earnings ratios, but it's not the first time people have bet big on a growth stock. It's the Google of solar on that score.

So the question is, how come they don't have any major competitors making cadmium-telluride solar cells? VCs have poured over $340 million into five start-ups that hope to make copper-indium-gallium-selenide (CIGS) solar cells in the last few years and CIGS solar cells aren't even on the market. Cadmium-telluride works and there are customers.

Researchers at Lawrence Berkeley and the National Renewable Energy Labs are working on cadmium-telluride cells. Germany's Q-Cells is building production of a line of cadmium-telluride cells through its Calyxo subsidiary, but it won't go online until next year. The first plant Calyxo plant will only have a 25 megawatt capacity. First Solar already has 210 megawatts worth of capacity and will more than double that figure with new factories in the next few years.

I asked some people and here's what they said:

1. Experience. First Solar was founded in 1999, but the history of the company goes back decades, according to Dan Myers of Crosslink Capital. Founder Harold McMaster made his first fortune in the late 1940s with Permaglass and later went onto Glasstech. McMaster was one of the world's experts on tempered glass.

In the 80s, McMaster got interested in solar technology and experimented with different ways to put photovoltaic materials on glass. He worked first with silicon and then cadmium-telluride with a company called Solar Cells. Solar Cells had a rough number of years financially but was finally reincarnated as First Solar in 1999.

2. Patient Investors. John Walton, of the Walton family fortune, was an early investor and stuck by the company through the very difficult early years. Interestingly, Myers noted that none of the big solar success stories have been emerged from the usual Silicon Valley path of being fostered along and funded by VCs, which usually want a return after five years or so. Instead, these companies have taken years to incubate.

3. The secret manufacturing sauce. The company has developed a process with its own machinery that can churn out high volumes of cells. What's more, the company can replicate those factories to rapidly expand capacity.

In a sense, the entire thin film solar industry is a competition around who can build a better machine. The CIGS solar cell companies will all have similar products. The difference between them lay in how they produce those cells: Miasole is sputtering the active materials onto substrates, while Nanosolar is printing them. Many companies are also making their own machinery. (A lot of the success of SunPower, which makes crystalline silicon solar cells, is also based around an efficient copy exactly methodology.)

With that in mind, it's probably a better analogy to say First Solar is trying to be the Intel of solar, rather than the Google.

4. Secrecy. The company doesn't let you see those fancy machines either, says Myers. He visited the company and was barred, like other visitors, from getting an up close look at the production line.

5. Poison. Cadmium can be toxic, which sort of scares some people away. The company has tinkered with its process to cut down on workplace toxins and has recycling programs with manufacturers.

No doubt, First Solar will get some competitors, but that is the situation today.

It's official. First Solar is the Google of solar companies.

The Phoenix, Ariz.-based maker of cadmium telluride solar cells and panels has soared past the $200 a share mark. It was up to $230 today and is currently trading at about $219.

Remarkably, First Solar had an initial public offering in the middle of November 2006. The stock went out at $20 a share, so effectively, it has gone up in value by 11 times in a little less than a year. Google went out at $85 a few years ago and is now above $700. The numbers are bigger, but the multiple isn't.

First Solar's stock is being driven by rapid growth in revenue and profit. In the third quarter, revenue came to $159 million, more than triple the $40.8 million for the same period the year before. Revenue for the second quarter came to $77.2 million, so revenue essentially doubled in three months.

Net income for the third quarter came to $46.0 million or $0.58 per share, compared to $4.3 million or $0.06 per share the year before.

Analysts expected revenues of $120 million and earnings per share of 19 cents this quarter. The financial results were announced yesterday. There is some speculation fever built into the stock price. The price-to-earnings ratio currently hovers around 287, fairly high, even by 1998 Internet bubble standards. But the company is making money.

Unlike silicon solar-cell makers or the armies of CIGS (copper indium gallium selenide) manufacturers, First Solar extracts electricity from thin films of cadmium telluride (a semiconductor made from cadmium and tellurium) on glass.

Although they are not as efficient as silicon cells, cadmium tellurium cells are comparatively cheap to make and are fairly robust. They operate in a wide temperature range and in a variety of light conditions, including dawn and dusk. In other words, cadmium telluride is the Honda Civic of solar-panel material.

The company isn't facing a material shortage, like silicon manufacturers, and it is producing product, unlike the vast majority of CIGS companies.

First Solar said this week that it has signed a deal to supply investment firm Babcock & Brown with solar modules in a deal that will bring it $1 billion in revenue between 2008 and 2009. Overall, First Solar has contracts to install more than 3 gigawatts of power through 2012.

To meet demand for the project, the company's board has approved a fourth manufacturing plant in Malaysia. Two are under construction, and the company announced a third manufacturing plant in April. Each plant will have four manufacturing lines. When up and running, each plant will be capable of turning out 120 megawatts worth of solar panels a year, or 480 megawatts in total.

That will more than double the company's existing capacity. Right now, the company has plants in Germany and the United States that cumulatively can crank out 210 megawatts worth of panels.

The Walton family of the Wal-Mart fame funded the company from the beginning and still owns a large chunk of the stock.

First Solar, those cadmium telluride oddballs, is on the move again.

The company said this week that it has signed a deal to supply Babcock & Brown with solar modules in a deal that will bring it a $1 billion in revenue between 2008 and 2009. Overall, First has contracts to install over 3 gigawatts of power through 2012.

(Credit: First Solar)

To meet demand for the project, the company's board has approved a fourth manufacturing plant in Malaysia. Two are under construction, and the company announced a third manufacturing plant in April. Each plant will have four manufacturing lines. When up and running, each plant will be capable of turning out 120 megawatts worth of solar panels a year, or 480 megawatts in total.

That will more than double the company's existing capacity. Right now, the company has plants in Germany and the U.S. that cumulatively can crank out 210 megawatts worth of panels.

On Wednesday, First Solar will announce earnings for its third quarter.

Unlike silicon solar cell makers or the armies of CIGS manufacturers, First Solar extracts electricity from thin films of cadmium telluride (a semiconductor made from cadmium and tellurium) on glass. Although not as efficient as silicon cells, cadmium tellurium cells are comparatively cheap to make and fairly robust. They operate in a wide temperature range and in a variety of light conditions, including dawn and dusk. In other words, it's the Honda Civic of solar technologies.

The company isn't facing a material shortage, like silicon manufacturers, and it is producing product, unlike the vast majority of CIGS companies.

The fact that glass, which is heavy, was a crucial part of the equation made some people skeptical early on, but the company has been growing dramatically. In the second quarter, First Solar reported $77.2 million in revenue, up from $27.9 million for the same period the year before. Net income came to $44.4 million, compared with a loss of $2.5 million for the same quarter the year before.

It went public about a year ago at $20. It now sells for $169 a share. Financial analysts love this company.

The Walton family of the Wal-Mart fame funded the company from the beginning and still owns a large chunk of the stock.