Beyond broad industry issues, the company faces challenges on a number of fronts.

Collapse of polysilicon prices. First Solar has made its mark by producing the lowest-cost panels in the industry. It's been able to do this with a thin-film technology that uses cadmium telluride as a semiconductor material instead of more expensive polysilicon found in traditional photovoltaic panels.

When the price of polysilicon spiked a few years ago, the company held a significant advantage over competitors who had to use the higher-cost material. Since the prices plummeted in early 2009, however, that advantage has narrowed. Low-cost silicon-based producers such as Yingli Energy and Trina Solar could become more competitive if their production costs continue to fall.

Young upstarts.
Dozens of companies focusing on thin-film technology similar to First Solar's have formed over the last few years. Although most of those upstarts are still having trouble obtaining financing for expansion, that could change if the market for solar energy expands, the IPO market improves, and venture capitalists emerge from hibernation to fill in the financing gap.

Industry consolidation. Smaller players are consolidating to produce greater efficiencies, as evidenced by MEMC Electronic Materials $200 million buyout of SunEdison last year. In a sign of life for private equity, U.S. buyout firm First Reserve Corp., which focuses on energy, recently made its first substantial foray into renewable energy projects with a substantial investment in SunEdison.

The China factor. A more immediate competitive concern to investors are Chinese solar companies, which have been able to slash solar panel prices thanks to their low labor and production costs, lower polysilicon costs, and generous corporate subsidies from the Chinese government. The state-run China Development Bank Corp. has also lent billions of dollars to Chinese solar companies for expansion. The loans will allow the Chinese companies "to deliver unprecedented economies of scale," predicts Jenny Chase, head of solar-energy analysis for New Energy Finance in London.

Glimmers Of Hope

Competition with Chinese silicon-based companies was the key reason that Credit Suisse analyst Satya Kumar downgraded First Solar in the second quarter of 2009. However, he upgraded the stock from neutral to outperform in June of this year based on both his improved outlook for the solar industry and superior prospects for First Solar.  

Kumar believes that polysilicon price drops will moderate this year, which could make it more challenging for competitors to match First Solar's low panel prices. While investor sentiment toward solar stocks remains tepid, he notes that demand for solar energy "continues to surprise positively," and that "lower valuation and negative sentiment are positive contrarian indicators" for the stocks.

Winslow's Robinson believes First Solar's competitors are going to have a hard time catching up with the industry leader. "Chinese companies are better at copying than innovating, and they haven't developed a product that's as good as First Solar's," he says. "And the generous loans and subsidies these companies get from the government may not last forever." He believes that the American company's superior technology will allow it to continue producing solar panels at significantly lower cost than its competitors for the foreseeable future.  Its technology is also better than traditional solar panels for larger installations such as utility-scale projects, which will become an increasingly large portion of global demand.

Morningstar analyst Stephen Simko expects that First Solar "will maintain its cost advantage over the next several years. By our estimates, First Solar holds more than a 20% cost advantage over its nearest competitors. So long as the company continues to reduce its costs by 10% to 15% annually, we see little chance of its cost lead disappearing anytime soon."