) -- At the end of 2011, shares of

First Solar

(FSLR) - Get Report

hit an all-time low, and shorts began to get a little nervous.

A stock that had been above $160 in 2011 had suddenly fallen so far so fast it was logical to believe that a much larger company

would acquire it and pay some level of premium that could burn shorts.

Now it looks like that risk has been taken off the table, as First Solar has hit a succession of all-time lows.

In fact, the removal of the takeout premium risk would help explain why First Solar can't find a bottom in recent trading, and that would relate directly to the biggest First Solar risk of all: the revelation from the company in its recent earnings that its thin film panels are experiencing problems operating in high heat.

Analysts remains typically divided on the First Solar story, but as a trading instrument, it seems that the shorts are a little less fearful today than they were just a few months ago about riding First Solar all the way down to single-digits, possibly $0.

In recent analysis of the First Solar earnings selloff, there were plenty of reasons to explain the negative sentiment. The company provided an even worse outlook for 2012 than it had provided just two months previous -- leaving the room open for a miss of earnings guidance that had already been slashed at the end of 2011. First Solar added to warranty charges that the company had said would not linger into 2012, and that left several analysts saying it was difficult to put much stock in management ability to assess the ongoing warranty liability.

The biggest risk of all, though -- that its technology might not even work in the intense heat conditions upon which its future strategy is focused- seemed like

a wild card issue that didn't need to be assessed to be down on the company's prospects.

Upon further analysis, it might be the one that is allowing shorts to get one last great trade on this stock, when they previously thought the last great First Solar trade

would expire at the $26 mark. At the same time, long investors could be as big if not an ever bigger part of the continued slide, "puking" First Solar stocks because the risk of technology failure is too significant to hold onto shares.

First Solar shares closed at $25.80 on Wednesday after a near 7% drop, bringing their five-day decline to 27%.

All of First Solar's sector peers have been declining in recent trading, but there's a key difference: First Solar is now below its low point of the year (and all-time low) while most of its solar peers, even after steady decline in recent weeks, are still positive in 2012 after a huge rally to start the year.

Solar trading history dictates that when consensus swings all one way, it's just as likely for stocks to swing in the other direction. That's what has happened this year: the solar sector opened at a low and rallied sharply but then came right back down, and with many solar stocks still likely to retest 2011 lows.

For First Solar specifically, "You can tweak a few assumptions and get to $50 or $15 for this stock," said Maxim Group analyst Aaron Chew said. He added that with solar stocks it's often good to run counter to consensus, and consensus right now is that everyone hates the sector and First Solar.

Yet there's a "consensus" catch with First Solar specifically, though, and that's what makes Chew more hesitant this time to consider that it's time to do the opposite of everybody else and say that First Solar will rebound.

"The scariest thing is people who say that the stock can't go to zero," he said. "I can't say it doesn't go to zero."

In essence, the consensus that is being spurned in the continued pressure on First Solar is the belief that even if things are tough, the company can't become obsolete.

"Are they going to become the VCR of solar?" Chew asked.

Chew is less focused on shorts ratcheting up the First Solar trade as a reason for the slide, though, than with long investors ditching First Solar. "What drove it from $80 to $30 was all the guys getting out," he noted. "Now it's broken $30 and the 52-week low," the analyst added.

Hari Chandra, analyst at Auriga Securities, remains a believer.

"First Solar is fine on its own and also despite this madness -- remember despite all the nonsense that gets spewed at it on a daily basis it is the


company that still makes money in the entire solar PV space."

For how long, though? If the First Solar business is predicated on finding equity buyers willing to take a risk on investments in large-scale solar projects with multidecade panel performance requirements, it does raise the question of how many will take that risk if the panel technology doesn't have the track record to back it up and the company itself is now only backing it up more hesitantly.

At the same time, the price of competing crystalline silicon panels is continuing down with the performance continuing to improve. Crystalline silicon panels have been used for more than three decades in the field.

It's not just that prospective project buyers might shy away, but that ultimately First Solar's balance sheet ability to pay warranty claims could be constrained, and it won't be easy for a company to raise equity for the purpose of paying off warranties to replace faulty panels.

This is a worst-case scenario. However, none of these questions can be answered today, including by a prospective project acquirer, or a GE-type company that might consider buying First Solar.

"GE would have to think twice," Chew said, though he added that the M&A analysis includes more wrinkles. When First Solar was at $50, it was arguably still too expensive for GE to contemplate as an acquisition, but in the $20s, even with 50% premium it becomes an issue of whether First Solar shareholders would be willing to sell.

"You may not be able to get First Solar shareholders to sell out at this level," Chew said. The most prominent of First Solar's shareholders is the Walton family of


(WMT) - Get Report


Chandra blames much of the First Solar woes on the

Chinese state sponsorship of its solar sector: "They cannot compete with insanity -- it is not competing with companies but it is competition against China as a sovereign entity. Once you understand that, everything else is very, very clear," the analyst argues.

The latest weekly data on the price of polysilicon, down 4%, showed that the Chinese solar supply glut continues, as pricing has again deteriorated again after a rebound at the beginning of the year.

Chinese solar companies continue to guide to big shipment gains this year, implying that there will be little shuttering of capacity among First Solar's top tier rivals.

On Wednesday,

Canadian Solar

(CSIQ) - Get Report

guided to as much as 2 gigawatts of shipments in 2012 -- banking on its project business in Canada and a ramp in its home market of China -- and that 2GW sales goal puts it ahead of First Solar's total production guidance for 2012. If it is to reach its 2GW sales goal, it's likely to be profitless in doing so, and Canadian Solar shares were down 13% on Wednesday, though still up 7% this year.

Chandra accepts that the First Solar call and the panel performance issues in high temperature have not helped. "First Solar's bad communication does not help. Since solar PV stocks are all trading oriented -- people can easily blow bad communication out of proportion -- and it surely seems to be the case with First Solar.

There was one tortured moment on the conference call with analysts when First Solar CEO Michael Ahearn was asked by Avian Securities analyst Mark Bachman about reports of workers being furloughed at First Solar's largest and one of its most critical project for neat-term earnings, Topaz.

At first, Ahearn said that he didn't know anything about it, and then after a pause, recanted, and said they had heard about it but it was nothing much to be worried about.

It may be possible that an interim CEO fighting to right a company that has overturned could literally not be aware of this issue, however, would it breed confidence if that were the case, and the First Solar CEO didn't even know about a work stoppage at its most important project? In that one moment, to say the least, First Solar management's credibility was strained.

Still, it's less the credibility of management but the credibility of the panels that allows First Solar shorts to say the greatest short of all isn't done just yet.

Chandra said, "We will see how this issue gets resolved -- fundamental issue and done with, or an operational issue that is fixable but with some extra cost."

Indeed, that last question seems to be the one that underlies First Solar trading, as shares seek out a bottom, or according some short bettors, continue into the abyss.

-- Written by Eric Rosenbaum from New York.


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