First Solar (FSLR, $263.35, down $28.64) fell nearly 10% yesterday despite an outstanding earnings report on Wednesday after the bell. The company reported earnings of $0.57 a share on revenue of $197 million. Wall Street analysts had expected, on average, earnings of $0.47 on revenue of $184 million. First Solar also raised its 2008 revenue forecast to between $975 million and $1.05 billion from its previous estimate of $900 million to $950 million.

So why did the stock drop? As you may know, the market is always looking forward and there’s been talk that other companies will give First Solar a run for their money over the next few years. At least that is the theory.

First Solar became public about a year-and-half ago. Their IPO was priced at $20 a share and on it’s first day of trading the stock closed at $24.74. Seven months later First Solar broke $100/ share. The stock has traded on future earnings and growth since it became public and now that growth is being questioned.

Let’s look at this picture from a different angle. Wall Street expects the firm to post earnings of $2.53 for 2008. If you take the current stock price and divide it by estimated earnings, you get a stock that is priced at 100 times forward earnings. That’s expensive to say the least.

I like First Solar as a company but I’m not willing to pay this much for a stock that is trading at 100x earnings. The stock could rebound and continue its steady climb to the moon but at some point valuations will come into play. The stock is already looking “top-heavy”. It may not happen anytime soon but when valuation really does matter, it could hit the stock harder than a Vegas headache.

Rick Rouse