First Solar shares tumbled by as much as 9.75% to $53.11 per share today after analysts at Needham downgraded the company from Buy to Hold for weaker margins and uncertainties. Trading on First Solar shares was extremely heavy today as by 1:15 p.m. Eastern, more than 4.6 million shares had changed hands, compared to the average daily volume of 2.14 million.

Today’s downgrade follows a strong earnings report from the company in October.

First Solar

First Solar’s 2016 earnings at risk

In a report dated Dec. 10, analysts Y. Edwin Mok and Arthur Su said they see significant risk to First Solar’s ability to meet management’s guidance for next year because they see margin trends becoming “substantially weaker” going forward. Management guided for 2016 revenue of between $3.9 billion and $4.1 billion and earnings of between $4 and $4.50 per share, which puts their outlook in line with the consensus estimates of $4.07 billion in revenue and $4.09 per share in earnings.

However, the NEEDHAM team added that their estimates include a $200 million benefit, amounting to $1.96 per share, from the expected sale of the company’s Stateline project and its share of 8point3’s earnings. They see risks to that $200 million gain if 8point3 can’t raise the capital needed to buy the project, if First Solar can’t find a third-party buyer, and if the potential buyer is able to negotiation a lower price, which of course would trim that amount down.

Weaker gross margins expected

First Solar management also guided for gross margins of between 16% and 18% for next year, which is much lower than this year’s range of 24% to 25%, and the NEEDHAM team said that the weaker than expected gross margins indicate that the mix is poorer than it was previously with a greater mix of EPC-based contracts (engineering, procurement and construction) and that pricing is weaker. They believe pricing will decline further in 2017 because of the phasing out of the investment tax credit on solar power systems.

The analysts also said the weak gross margins suggest a shortened time to cash on delivery for certain projects, which means a lower margin, and no revenue or gross margin from the Stateline sale, which will have a negative impact of 200 basis points on First Solar’s gross margin. They believe the mix of EPC-based contracts will rise as the company ramps international sales. As a result of all these problems, they expect the solar panel installer’s gross margin for 2017 to decline again to 15.8%.

Demand and pricing trends uncertain for First Solar

The NEEDHAM team also suggested that as the investment tax credit on solar projects is phased out, demand for the company’s products might weaken even though management remains optimistic that unit sales will remain strong but decline year over year. However, Mok and Su maintain that demand in the U.S. will probably slow down and the unit mix will likely shift over to more third-party module or EPC contracts.

When pairing these trends with declines in pricing for systems and falling margins after the end of the tax credit, plus the one-time gain from the Stateline sale this year, they expect an 11.4% year over year decline in revenue in 2017, which would bring it to about $3.5 billion. They expect 2017 earnings to also drop off significantly, falling from $4.35 to $1.74 per share.

Better efficiency needed

Another problem the NEEDHAM team noted for First Solar was the delay in the company’s efficiency roadmap. The race is on for solar companies to create panels with greater and greater efficiency levels, and they expect module efficiency to become increasingly competitive. They do believe the company can expand into rooftop solar or other markets, although they’re disappointed about management’s guidance for next year’s efficiency to reach 16.2%.

That’s lower than the third quarter lead-line efficiency rate, which was 16.4%. The NEEDHAM team also noted that First Solar management is slowing the rollout of new technology in order to keep utilization high. However, they don’t think some markets will be able to use the higher efficiency modules with anti-reflective coating, presenting yet another problem for the company.