In an article released this morning entitled "Nightfall Comes To Solar Land," Bill Alpert of Barron’s predicts that the massive drop in silicon prices over the past year, combined with cooling demand for solar energy, will have a negative impact on the solar industry in general, particularly thin-film manufacturers like First Solar (FSLR) and Energy Conversion Devices (ENER). These two companies based their business models on a market in which there was not enough silicon to go around, and silicon prices were up to $450 per kilo. Now that prices are down to $100 per kilo, their products no longer offer a significant cost advantage over regular silicon solar panels.

According to Alpert, the bottom line is this:

Shares of the solar-panel makers First Solar and Energy Conversion Devices look vulnerable as silicon prices drop, narrowing their cost advantage versus silicon rivals….
As practiced silicon refiners like Hemlock turn on new production, supply may outstrip demand by 50% this year and 75% next year. Latecomers like LDK Solar (LDK) plan big refineries, although LDK’s project just suffered storm damage. In the next five years, producers plan to double capacity from about 100,000 tons this year to 200,000 tons. That will help make solar power as cheap as the fossil-fueled power grid, and it’s impossible to overstate how wonderfully that will help stem global warming. But barring a price-fixing conspiracy like some memory chip makers periodically attempt, the solar industry’s margins may not be so hot.

Zachary Scheidt at Seeking Alpha disagrees. In this rebuttal to Alpert’s article, Scheidt argues that the three factors Alpert cites as being responsible for decreased demand (the financial freeze, lower oil prices and fewer government incentives for solar) are rapidly turning back in solar’s favor. He argues that this will benefit many solar stocks, and should also stabilize the price of polysilicon, allowing thin-film producers like First Solar and Energy Conversion Devices to remain competitive.

Here is his conclusion:

Even if all the arguments Barron’s points out were accurate and had the expected effect on the solar market, investments in this area could still perform quite well. This is because the stocks have already largely discounted a negative environment for solar energy.

Many traditional suppliers have dropped 80 to 90% of their value and while First Solar has held up better than most, its stock is still trading for less than half its value last year. Energy Conversion Devices is less than a fourth of its August level. Both of these stocks are trading for multiples that seem more than reasonable given their industry leadership and the expected growth over the next few years.

So in summary, I don’t dispute the facts of the Barron’s article, but I think I would come to a different conclusion based on the way the current stocks are trading and the encouraging signs in the industry.