For First Solar, It May Soon Be Game Over (Update 1)

(First Solar story corrected for 2008-2009 manufacturing defect warranty claims and hot climate warranty accruals)

NEW YORK (TheStreet) -- Imagine a company that has predicated its future on building out large-scale projects in desert conditions. Now imagine the technology the company uses doesn't have a long-term track record of performing under intense heat.

You don't have to imagine the company. It's First Solar (FSLR), and based on the revelation in its Tuesday conference call with analysts that high-temperature degradation issues have surfaced with its panels, it's the most alarming prospect for a company in the midst of a critical strategic transition.

To some First Solar watchers, this looks like a slam dunk reason to sell. Axiom Capital analyst Gordon Johnson more or less made this case on CNBC on Tuesday afternoon, saying that if First Solar technology doesn't work, the stock is essentially worthless.

Stifel analyst Jeff Osborne put it more mildly in writing, "We see the disclosed heat-driven degradation issue as lowering the economics of expanding into new markets and potentially posing a product acceptance risk."

One thing is certain: First Solar didn't need the added headache of two solar panel warranty issues: a manufacturing process defect that impacted panels made between 2008 and 2009 that has lingered for the company, and the broader issue of solar panel performance in the hot weather areas that are increasingly important to First Solar's future.

On the 2008-2009 issue, one could hear the exasperation in the voice of Citigroup analyst Tim Arcuri during the conference call when he questioned First Solar management about the warranty charges taken in the current quarter.

The contradictions in the First Solar warranty story warrant notice and are worth laying out:

First Solar is positioning itself as a future winner in building large-scale solar projects in sustainable solar economies. Many of these solar economies will be in high-temperature regions across the globe, where high-temperature performance will be a critical issue

First Solar's technology has no long-term track record of performing in these high temperature regions.

First Solar reassured investors that the manufacturing defect that impacted panels made between 2008 and 2009 really is being put to bed. However, analysts ask if First Solar was wrong in calling an end to this issue last quarter, why couldn't it be wrong again?

The company also responded to a question about the high-temperature degradation issue by saying it doesn't have enough information yet to provide detailed answers.

In other words, while First Solar is confident that the 2008-2009 warranty issue is close to being put to bed because only 4% of warranty claims are left to get through, it couldn't provide assurance that the high-temperature degradation issue wouldn't lead to future claims. Until First Solar provides a detailed explanation of what went wrong and why it will never happen again, this issue is alarming.

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