First Solar, for example, is expected to double production of solar panels to the equivalent of more than one gigawatt of panels (the equivalent output of a nuclear power plant). Management concedes that demand may not keep up with supply: "We regard oversupply as a risk that we need to continue to monitor very closely," said CEO Michael Ahearn. It seems almost inevitable that FSLR and its peers will be posting fast-rising inventories over the next few quarters, and that is not likely to sit well with investors.

And oversupply means even tougher pricing. First Solar can handle that, even if 50%-plus gross margins and 15% operating margins need to take a hit in the near term. But what about the peers that are also flooding the market. Can they afford a price war?

Evergreen Solar ( ESLR) just posted a $52 million quarterly loss on skimpy 4.6% gross margins. What do gross margins look like when end-user pricing will be falling at a fast clip?

Suntech Power ( STP) just reported 0% gross margins and has tapped more than $1 billion in credit lines to meet funding needs. In short, this is not a business model that is prepared to handle a pricing shakeout.

In addition, even for those companies that have enough cash to weather the near-term downturn, profit forecasts still look far too high. For example, JA Solar ( JASO) is expected to lose money in the December 2008 and March 2009 quarters, but it's hard to see how the company can post a sharp rebound in profits for the rest of 2009, as the consensus forecast seems to imply.

In fact, almost all industry forecasts seem to be counting on a significant boost from U.S. government policies in 2009. But even if the Obama administration doles out more goodies beyond the recently-announced investment tax credits, any major new projects are unlikely to hit P&Ls before 2010.

For the longer term, it does appear that the U.S. and other governments will be providing material economic incentives to solar, as they strive to meet renewable portfolio standards (RPS). But before that happens, the industry could look pretty bleak for the next few quarters -- at least.

Know What You Own: Other solar stocks include LDK Solar ( LDK) and Solarfun Power Holdings ( SOLF).

This was originally published on RealMoney on Feb. 25, 2009. For more information about subscribing to RealMoney, please click here.

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.

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