First Solar Downgraded By Vertical Group's Gordon Johnson: 'We Think It's Time To Fade This Stock'

As China chops its solar installation incentives, First Solar, Inc. FSLR’s story is taking a turn for the worse.

Vertical Group’s Gordon Johnson double downgraded the stock Thursday in light of both the Chinese policy decision and prior solar policy actions in Spain, Germany and Italy.

“In any country where incentives are pulled, solar installations drop to essentially nothing,” Johnson said on Benzinga’s PreMarket Prep show.

What’s Going Wrong

China is temporarily cutting its utility scale incentive and indefinitely capping installations at 10 gigawatts — just half of the amount installed last year and representing about 54 percent of global solar installations.

The resulting decline in demand, coupled with a rise in capacity, is seen to lower average selling prices from 27 cents to 24 cents or lower.

“At that level, given First Solar’s targeting a cost of 22 cents for Series 6, we don’t think they’re going to be competitive in the global markets,” Johnson said.

He expects First Solar either to delay or end its expansion plans or to suffer cancellations from clients contracted through 2020.

“With those things in mind, we think it’s time to fade this stock." 

Industry Implications

The circumstances aren’t exclusive to First Solar. They’re bad for everyone.

“When solar market behemoths from a demand perspective reduce incentives, demand collapses, and we think that’s what you’re going to see right now in China,” Johnson said. “We think it has negative implications for all solar stocks. Essentially ASPs are going to fall, competition is going to become fierce and everybody’s going to be pressured.”

When 2018 sales contracts conclude for Tier 1 solars, Tier 2 and 3 companies are expected to step in with discounted opportunities in China. The competitive rates could drive contract cancellations for Canadian Solar Inc. CSIQ and JinkoSolar Holding Co., Ltd. JKS, which will be forced to lower prices.

Notably, industry progress in the U.S. does not lend any comfort. Recently announced requirements to install on new California homes does not offset the 20-gigawatt loss in Chinese demand, Johnson said. 

What Justifies Bullishness

Early bullishness on First Solar was driven by the Trump administration’s 201 tariffs.

“If Trump is not in office in 2020, those tariffs essentially end, and when those tariffs end, that temporary benefit to First Solar is going to go away,” Johnson said.

He said he would only reverse his position on the stock if the Trump administration’s solar tariffs were extended and China reversed its position.

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