Why I'm Not Buying First Solar...Yet

First Solar (NASDAQ: FSLR) seems like it should be the best bet in the solar industry today. It has a long history of profitability, contrasted by an industry full of companies who lose money. And its expected $1.5 billion to $1.7 billion in net cash on the balance sheet at the end of 2017 is something no other company can boast.

But the outlook for First Solar may not be as bright as it first appears. Here's why I'm skeptical this will be the industry's biggest winner long term.

First Solar's big bet on thin film

Last year, First Solar decided it would kick-start its technology upgrade plans and move straight from Series 4, which was in production, to Series 6. The upgrade will be complete in 2019, but it'll also cost about $1 billion to complete.

Making the move to Series 6 is the right one for First Solar because it was being undercut on cost and beaten on efficiency by silicon-based solar panels coming from China. But the improvement coming from Series 6 isn't going to be a leap forward in efficiency. First Solar is changing its form factor from very small solar panels to a larger size, closer to the industry standard, which is expected to lower installation costs. And when combined with lower costs for the solar panels themselves, First Solar thinks the price will be competitive.

The one number to keep in mind is that management has said it's targeting a Series 6 solar panel that's at least 18% efficiency. That beats most commodity solar panels today, but may not by 2019.

What the competition is doing

Most of the solar panels today are made using multi-crystalline silicon cells that are then assembled into a solar panel. The cost of this commodity product is around $0.35 to $0.40 per watt on the open market and will be 15% to 17% efficient. First Solar's efficiency of 16.7% in the first quarter of 2017 is basically on-par with competitors.

The problem for First Solar is that competitors are increasing their own efficiency rapidly. Multi-crystalline silicon production is being replaced by more efficient mono-crystalline production and even more efficient mono-PERC (passivated emitter rear contact) solar cells. And even commodity solar producers are approaching 20% efficiency as a result.

One interesting contrast to First Solar's Series 6 product is SunPower's (NASDAQ: SPWR) P-Series. This is technology that uses commodity solar cells and then shingles them to make a solar panel. But SunPower can buy commodity solar cells to make P-Series and the capital cost to build capacity is only $0.05 per watt, or about one-sixth of what First Solar's Series 6 upgrade will cost. And here's the kicker: SunPower says it will make a 19% efficient P-series panel with mono-PERC cells in 2017!

SunPower is just one example of a company that will make a solar panel more efficient than First Solar years before Series 6 launches. And if these competitors can match, or beat, First Solar's costs, the product upgrade could be a disaster before a panel is ever produced.

Behind the 8 ball already? 

It's possible that Series 6 will be more efficient than 18%, and First Solar always points out that its solar panels get more energy per rated watt than competitors. But the fact remains that First Solar is spending around $1 billion to upgrade its manufacturing equipment to a new product that may not be competitive the day it's released. Investors looking at First Solar as a safe bet in the solar industry may want to think again.

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Travis Hoium owns shares of First Solar and SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.