RomoloTavani I first covered First Solar (NASDAQ:FSLR) in April; I allocated a Buy rating at the time, and since then, the stock has gained roughly 47.5% in price. Now, I consider the stock to be fairly valued at best, if not overvalued, which is why I am downgrading my rating to a Hold. I am doing this despite my very positive long-term outlook on First Solar. I believe over the next decade, it is likely to deliver strong price returns, primarily a result of the global increase in solar energy demand, low solar energy cost per kWh, and increased dependence on solar energy to power AI infrastructures. However, there may be periods of high volatility due to the uncertainty in macroeconomic conditions, alternating between favorable and unfavorable for solar power companies. How First Solar Might Develop In my opinion, First Solar might benefit from growth in international markets, a growth catalyst that may be currently undervalued by investors. Management is aggressively expanding manufacturing capacity globally; this includes a new facility in India with a 3.3 GW capacity, an indication that the firm intends to cater to international demand. The demand for solar energy is increasing globally amidst rising concerns about climate change there is, therefore, a vast potential market for First Solar’s products. Contributing to the potential opportunity in markets outside the United States is that the company offers thin-film panels, which have a lower carbon footprint and water usage compared to traditional silicon-based panels. While thin-film solar panels have traditionally lagged behind crystalline silicon (‘c-Si’) panels in terms of efficiency, management is developing the efficiency of its cadmium telluride (‘CadTel’) technology to close this gap. While c-Si panels typically achieve efficiencies of 20% or higher, CadTel panels are typically in the range of 15-18%. First Solar’s current R&D expenses are $164.5 million as of the last trailing twelve months, with a significant portion dedicated to CadTel technology development. Recently, in 2023, the company achieved a record research cell efficiency of 24.4%, and its target by 2025 is for efficiency to exceed 25%. Therefore, I think the future of First Solar is likely to be very positive, with its thin-film technology getting moderately better demand due to its competitiveness with c-Si panels. However, c-Si panels are also growing in efficiency capabilities, and commercial modules are forecasted to reach mid-20% efficiency achievable in the near future. In addition, First Solar’s development of tandem technology should significantly boost the efficiency of its thin-film solar panels by utilizing multiple layers of varied materials to capture specific parts of the solar spectrum. If successful, this tandem technology venture could generate highly efficient and cost-competitive solar panels that would be highly accretive to FSLR shareholders and potentially boost solar energy adoption worldwide. However, First Solar is not the only company developing this, and it is likely to take several years for these developments to become commercialized at scale. Given my above analysis of First Solar’s international expansion trajectory and focus on thin-film technology, the top three competitors to the company are likely to be as follows: JinkoSolar (JKS) One of the largest producers of solar panels with a diverse portfolio, including monocrystalline and polycrystalline silicon panels. Canadian Solar (CSIQ) Another leading global solar panel manufacturer offering a wide portfolio, including modules, inverters, and energy storage. LONGi Green Energy This Chinese company is the world’s largest producer of monocrystalline silicon wafers and modules. Click to enlarge These are the three companies that I will be using in my financial peer analysis and valuation analysis to follow. However, it is worth mentioning that none of these companies work with thin-film technology, which sets First Solar out as one of the only major solar power companies with a distinct offering. First Solar should be given credit, in my opinion, because it controls its entire manufacturing process, from raw materials to finished modules. This allows management to maintain quality, optimize efficiency, and potentially reduce costs over the long term. This also provides benefits to relative immunization from supply chain disruptions. However, First Solar primarily focuses on utility-scale solar projects and has a limited presence in residential and commercial solar markets. This means it lacks diversification and can make the company vulnerable to fluctuations in the utility-scale markets. In addition to this, the company’s intense competition from Chinese solar manufacturers shouldn’t be underestimated, where positive and relatively consistent Government subsidies and lower labor costs have the potential to put pressure on First Solar’s profitability. Financial Analysis Over the past year, FSLR’s profitability margins have been increasing rapidly, with its net income margin at 28.75% at present against the 10-year median of around 9%. The recent profitability gains have been represented in each of the three core margin metrics: Author, Using Seeking Alpha This can be attributed to recent efforts like the Inflation Reduction Act (‘IRA’) in the United States, which has been a major catalyst for First Solar. This bill provides substantial tax credits and incentives for solar energy projects, providing a boost in demand for solar panels. In addition, supply chains have eased after pandemic-related disruptions and rising traditional energy prices, particularly due to geopolitical events, have boosted demand for solar power as a cost-effective alternative. Indeed, solar power sources are cheaper than fossil fuels by a significant margin at this time. The International Renewable Energy Agency (‘IRENA’) has reported that the global weighted average cost of electricity from solar photovoltaic (‘PV’) systems fell by 89% between 2010 and 2022, reaching $0.049 per kWh. In contrast, the cost of the cheapest fossil fuel-fired electricity generation typically ranges from $0.05 to $0.17 per kWh. These are levelized costs, accounting for the lifetime costs of power plants. First Solar has notably higher profit margins than Jinko Solar and Canadian Solar due to a combination of factors, but there are a few factors worth mentioning here. Firstly, its thin-film technology can lead to lower costs. In addition, First Solar focuses on utility-scale solar projects, which typically have higher profit margins than the residential and commercial markets Jinko Solar and Canadian Solar are more involved with. I should also stress that because First Solar is so well vertically integrated, controlling a large portion of its supply chain, it is able to benefit from cost control during periods of lower capital intensity. It’s also evident that First Solar’s profitability is cyclical to some extent, as demand for its products and services is driven by economic cycles, government policies, commodities and other catalysts. Author, Using Seeking Alpha For comparison, LONGi, which is listed on the Shanghai Stock Exchange, currently has a net margin of around 4%, which is a significant contraction from its 10-year median of around 11.5%. If we look carefully at First Solar’s income statement, we can see that it is the higher revenue in fiscal 2023 compared to 2022 and lower cost of goods sold YoY, which is the biggest driver of the margin expansions: Seeking Alpha Primarily, I attribute this to the supply chain easing I mentioned, as well as the fact that the company can benefit from lower manufacturing costs due to its vertically integrated operating model. I think it is worth investors considering what might happen if the profitability margins begin to contract from present levels, which is highly likely considering the cyclicality of First Solar’s business and, particularly, how this affects its gross margin due to higher or lower cost of goods sold. For example, if the potential coming Trump administration rolls back environmental regulations and incentives, for example, weakening or rescinding the Inflation Reduction Act, the valuation of First Solar stock could come down significantly as growth and demand would be inhibited. Trump has also favorably viewed fossil fuels; therefore, fossil fuel subsidies and potentially relaxed environmental regulations might provide a less favorable market environment for solar power companies. This has to be carefully weighed against the fact that Trump has a more nationalistic rather than globalist outlook on world politics, making tensions between Russia and China potentially less severe if he is elected. This would potentially negate some of the risk of supply chain disruptions from geopolitical events escalating, which are perhaps more likely under a second term with Biden. It is crucial to understand that First Solar and other solar power companies are heavily dependent on sensitive changes in political and geopolitical climates. While the long-term narrative is undoubtedly towards higher solar adoption across the world and most likely with this form of power becoming dominant through 2050, the road to this end goal is not clear, with several conflicting interests and political objectives potentially inhibiting growth for extended periods of time. Analysts are expecting, on consensus, the earnings growth delivered by First Solar over the last year to continue, with YoY growth of 69% in fiscal 2024, 61% in fiscal 2025, and 40% in fiscal 2026. However, beyond this, the growth may begin to contract more severely, and in my opinion, long-term investors like myself would be wise to monitor the valuation very carefully over the next few years to ensure they are not exposing themselves to heavy downside volatility if and when current upcycle begins to wane. Further Value Analysis To begin this value analysis, consider the following table, which presents First Solar against its peers on P/E and P/S ratios: First Jinko Canadian LONGi FWD P/E GAAP 19.3 7 7.5 25.5 (‘TTM’) Historical FWD P/E GAAP 5Y Avg NM 15.85 12.2 29 (‘TTM’) FWD P/S 6.2 0.08 0.14 1 (‘TTM’) Historical FWD P/S 5Y Avg 3.8 0.25 0.35 3.75 (‘TTM’) Click to enlarge Please note that LONGi is listed on the Shanghai Stock Exchange, so I have access to its TTM data only. It is very evident from the above table that First Solar is the anomaly of the group. Its price-to-sales ratio has increased compared to its 5Y average, while the others have decreased. This is primarily a result of contraction and stagnation in Jinko, Canadian, and LONGi, which are all, at varying distributions, much more heavily exposed to China and other diversified international markets than First Solar, which generates around 96% of its operating revenue from the United States. For a visual representation, please consider this chart: Author, Using Seeking Alpha It is also possible to assess First Solar using a discounted earnings (‘DE’) model, which is the more appropriate discount model to use because the company has had negative free cash flow almost every year of the past 10, a result of its high capital expenditures that I largely attribute to its ongoing maintenance and development of its vertically integrated manufacturing business model. Here is my calculation of First Solar’s weighted average cost of capital, which I use as the discount rate in my DE model: Author’s Calculation For the growth inputs of my DE model, I used 15% for the first 10 years and 7% for the second 10 years, which accounts for the cyclicality involved in FSLR’s earnings, as well as dampened expected growth due to the uncertainty in the macroeconomic environment which could inhibit the company’s expansion. This contrasts slightly with the last model from my first analysis, where I opted for a slightly higher 2024-2034 growth rate and a lower 2034-2044 growth rate. My discount rate is also higher because I used the general market return as my discount rate previously. Author’s Model In the core model above, I have added the tangible book value per share because I consider First Solar’s vertically integrated operating model involved in manufacturing to contain assets of high-value worth incorporating into the intrinsic value estimate. If I were to remove this, the stock would be overvalued by 29.92%, with an intrinsic value of $199 estimated. However, this estimate is not realistic when assessing the company for a price target. The reason is that, as we can see in the above P/S ratio chart, the company’s valuation has been increasing in an exponential trend. I believe this is largely in anticipation of future solar market dominance because, as we can see in the following chart, the revenue growth so far has not actually warranted this: Author, Using Seeking Alpha Therefore, I think investors may want to consider that the price-to-sales ratio for FSLR may deflate in a scenario where global solar energy adoption growth becomes less pronounced. However, I see this as unlikely. Instead, I believe that solar energy will continue to grow, and First Solar is very well positioned in domestic U.S. markets and may be able to grow significantly in international markets. Therefore, it may be reasonable to assume that over time, the company’s price-to-sales ratio expands to 9 in an optimistic scenario. If its revenues, then grow at a rate of 10% per annum for 20 years, the company could achieve a revenue per share of $224.33 by 2044, making the implied price target $2,018.97 by 2044. That implies a potential 20-year price return CAGR of 10.83%. Risk Analysis I have mentioned a multitude of risks throughout this thesis that may affect FSLR shareholders, but I believe it is worth exploring in more detail the risks I could see unfolding for the company if geopolitical conditions worsen over the next decade, disrupting supply chains and lessening interest in green energy initiatives in place of wartime spending initiatives. If nationalism becomes more pronounced, there is the chance that countries prioritize their own resource needs, which could increase costs due to export restrictions or the nationalization of key raw materials such as cadmium telluride. Escalating trade disputes may result in high tariffs on imported solar components, and regional instabilities may disrupt production due to factory closures, labor shortages, or transportation bottlenecks. First Solar currently has manufacturing plants in Malaysia, Vietnam, and India outside of the United States. Geopolitical tensions and wars could also push countries toward energy security as a priority, using nuclear and fossil fuels as a means to do this, sidelining more idealistic green energy initiatives like solar, hydro, and wind powers. This wartime environment would also likely raise interest rates, curbing growth and potentially lowering demand. It would also likely be inflationary to pay for war efforts. In my opinion, it is absolutely in the global interests of all parties, companies and individuals from around the world to navigate potential tensions with respect for national cultures and to adopt a cooperative individualism to avoid further conflicts. In aggregate, a failure to do this appears that it would be highly contractionary to global economic progress. Nonetheless, the risk at this time remains and must be assessed as a possibility. Conclusion First Solar is positioned with heavy exposure to the United States solar power markets compared to more internationally diversified competitors. Its thin-film technology has a lower carbon footprint and water usage compared to traditional silicon panels, but the efficiency of First Solar’s panels is lower than the traditional models at the moment. While the company is likely to benefit from exponential growth in solar power adoption in the U.S. and globally, helped by a lower cost per kWh for solar power than fossil fuels at this time, investors need to recognize the company has a track record of cyclicality in earnings. This is likely to continue, as there is still work to be done on developing a unified focus in the United States on the importance of solar adoption and green energy. In addition, the future potential for wars as a result of current geopolitical tensions might create supply chain and cost issues. All of these scenarios need to be taken into consideration, but in an optimistic long-term future, I see it likely that FSLR’s P/S ratio will expand moderately, leading to my prediction as a base case that the stock will achieve roughly 11% stock price growth per annum over 20 years. In my opinion, this is too close to the S&P 500’s likely results over the period to warrant a Buy rating at this time, which is why, on my further analysis of my company here, I have downgraded the stock to a Hold for now.
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