FORTUNE — The darling of the solar panel industry has been stuck in the mud. First Solar earned the respect of investors as the world’s lowest-cost maker of solar panel systems soon after its 2006 IPO. The stock later roared past $300. Then worries of Chinese competition and 2008’s market collapse sent shares barreling back to Earth. The stock has bumbled around $125 for much of the past two and a half years as worries about solar oversupply and falling prices keep the market’s expectations muted. More recently, the market began fretting over First Solar’s prospects when Germany and Italy, two of the world’s largest solar users, instituted austerity measures. Two analysts provide the case for and against buying its stock.

The bull: John Hardy, Gleacher & Co.

The industry is definitely going through a transformational period. Things are not healthy out there. But that was discounted into First Solar’s (FSLR) stock this year as it moved from $170 to $125. Investors should now take a longer-term view.

Looking into 2012 and 2013, you begin to approach earnings that look very favorable. The company has developed some pretty significant projects over the next couple of years. It recently won Department of Energy conditional loan guarantees worth $4.5 billion — more than any other company — that will support all its large projects through 2013. That will reduce risk on future projects and allow it a lower cost of capital. (No one has ever built a 550-megawatt utility scale solar project before, as First Solar will have done.)

Ultimately what you’re talking about in this industry is cost reduction. Who has the lowest cost solution? Given that solar isn’t economical today, the number one bullet point for First Solar hasn’t changed in several years — it’s far and away the lowest-cost provider of solar systems and modules.

Its competitors’ modules have gotten a lot cheaper, which is definitely a threat. That being said, First Solar has much more control over their supply chain than any of their competitors because it’s vertically integrated all the way from module all the way down to developer end. Its competitors are basically subject to supply and demand in the polysilicon industry. And that’s been very difficult to predict over the past five years.

First Solar is a risk-reward investment based on what you think has been discounted into the stock. Our point is the current weakness is widely known, and now you can start to get more constructive on the longer-term story.

We think the stock will rise to $165 in the next year.

The bear: Dale Pfau, Cantor Fitzgerald

The global solar market is subsidized, usually by governments, because the technology is uneconomical at today’s prices. But subsidy rates are coming down. Europe is the largest market, and that’s where austerity measures are kicking in. Already Germany cut subsidiary rates. We’ve had serious issues in Italy. Meanwhile virtually every panel manufacturer in the world has been adding capacity over the past 18 months. Prices have come down precipitously this year, and I expect them to decline further in the second half of 2011. When prices begin falling, it’s a question of how low other manufacturers are willing to sell. It could get very ugly.

All of this is good for consumers or enterprises installing solar panels, because the cost of the system will decline. That becomes a self-fulfilling prophecy. As panel prices go down, those countries that are offering subsidies say, “Look prices are coming down. We don’t need to subsidize as much as in the past.” So prices go down some more.

My opinion is that we get to a point where solar panel makers are earning margins between 10%-20%. Some will have to go out of business. Once we find a stabilized market price, we’ll also be in a position to determine who will be survivor. One could say First Solar, as a low-cost producer, will be a survivor. I believe that. But what is valuation of the stock at that point?

The market is being too optimistic that First Solar, which is a great company, can avoid significant declines in the prices of its products, and maintain a premium P/E multiple. Its margins will fall from 46% to below 40%. The lower the gross margins go, generally the lower the multiple people are willing to pay for the stock.

We think shares, now trading around $125, can dip to $87.

This article is from the August 15, 2011 issue of Fortune.