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SunPower Corporation (SPWR), Suntech Power Holdings Co., Ltd. (ADR) (STP): Is First Solar, Inc. (FSLR) a Good Investment?

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First Solar, Inc. (NASDAQ:FSLR) has been a roller coaster ride over the past three years. After being left for dead in 2012, First Solar, Inc. (NASDAQ:FSLR)’s stock price has increased more than 200% from the June 2012 lows. The European budget crisis that led to lower solar subsidies is now in the rear-view mirror, but the solar industry is still suffering from chronic oversupply. With the recent pullback, should investors buy First Solar, Inc. (NASDAQ:FSLR)?

Enormous demand
There is no doubt the demand for electricity will increase over time. As emerging markets become more affluent, their citizens will use more energy as their standard of living increases. Because of increasing concerns about climate change, the demand for renewable energy will grow faster than the demand for electricity.

First Solar, Inc. (NASDAQ:FSLR)As an integral part of renewable energy, solar energy will see increasing demand as it achieves grid parity in more and more areas.

Deutsche Bank predicts that the number of markets where solar is at equal or lower cost than traditional energy sources will double over the next five years and the research firm Navigant Research predicts that the global solar market will be worth $134 billion by 2020 .

A polysilicon fall and efforts to rebound
Because of the enormous growth of the solar industry from 2005 to 2008, the polysilicon spot price increased several-fold , making it very expensive for traditional solar panel makers to produce panels.

Since First Solar, Inc. (NASDAQ:FSLR) uses cadmium telluride rather than polysilicon for its solar panels, it had a price advantage that made it very profitable. However, as polysilicon prices fell from $400/kg in 2008 to $18/kg today , First Solar, Inc. (NASDAQ:FSLR) lost that price advantage, and its operating margin declined sharply. The operating margin compression and corresponding profit decline was further exacerbated by industry-wide oversupply caused by Chinese manufacturers producing at breakeven or a loss.

First Solar tried to cope with compressing margins and declining profits by laying off 2,000 workers and improving solar cell efficiency. The increased efficiency allowed First Solar, Inc. (NASDAQ:FSLR) to lower its manufacturing cost per watt from $0.75 in 2012 to $0.63 in 2013 .

In addition to cutting costs and improving efficiency, First Solar made an alliance with General Electric. The company recently purchased General Electric’s thin-film solar patent portfolio in return for 1.75 million First Solar shares. The two companies will collaborate on thin-film solar module R&D and will buy each other’s products in hopes of further lowering costs and improving efficiency.

First Solar’s efforts have worked. The company’s operating margins have stabilized. Unlike its other competitors, First Solar is solidly in the black this year, and is predicted to make money in the future. Analysts expect First Solar to earn $3.80 a share in 2013 and $3.28 a share in 2014. While the company is expected to have declining profits for the next five years, First Solar current strength will give it opportunities to acquire future growth at basement prices. Going forward, First Solar also hopes to lower manufacturing cost per watt further to $0.40 by 2017  from $0.63 in 2013 .

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