First Solar (FSLR) reported its Q1 2012 results last Thursday, posting a 25% drop in quarterly sales from the previous quarter.

The company also lowered its sales guidance for the year, estimating that it would sell between 1.4 GW and 1.7 GW of panels this year in light of falling global demand. The company sold close to 2 GW of panels in 2011.

Gross margins dropped to 15.4% in the last quarter, falling from around 45% in the same period last year. First Solar also estimated modest growth in panel sales over the next few years. Competitor SunPower (SPWR) also came out with earnings last week that demonstrated the weak industry conditions.

We have revised our price estimate for First Solar's stock to $22, which is still about 20% ahead of its current market price.

Falling sales

With global panel sales set to fall in 2012, First Solar has responded by cutting its workforce by 30% and shutting manufacturing capacity in Germany.

With gross margins in the panel manufacturing business falling, First Solar is concentrating on its systems installations business and is looking to harvest new technologies to make solar power more competitive with conventional electricity sources.

The company is also focusing on technology that can more reliably predict electricity generation from solar energy and on grid integration technology.

Despite this new strategic direction, problems with the panel manufacturing business are taking a toll on the company's earnings, and falling demand for panels and tough competition from Chinese players have forced the company to reduce its manufacturing capacity.

First Solar is also predicting measured growth in panel sales over the next few years, expecting to sell 2.7 GW–3.0 GW of panels by 2016. Failing margins and higher-than-expected​ selling, general and administrative costs are also contributing to our revision of the company's stock price. Lower sales from the German market have also pushed the company's earnings estimates lower.

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