First Solar Is Positioned For Enduring Success

Nov 05, 2024

First Solar (NASDAQ:FSLR) is the largest solar company in the U.S., and it is well-positioned to continue growing over the long term, given the current trends toward renewable energy, which I believe will be enduring. Although the company faces significant technological competition, its distinct technology offering is more of an asset than a liability. Moreover, despite macroeconomic risks that could intensify, First Solars robust balance sheet makes it likely to endure any temporary hardships due to geopolitics or other factors.

Warning! GuruFocus has detected 6 Warning Signs with FSLR.

First Solar primarily sells to U.S. customers and focuses on utility-scale solar energy projects. Its thin-film PV technology employs cadmium telluride (CdTe) as a semiconductor, offering lower costs, superior scalability, and higher theoretical efficiency limits compared to traditional crystalline silicon (c-Si) modules. Management has established a vertically integrated business model, allowing the company to turn sheets of glass into solar panels in about four hours.

The company operates production facilities in the U.S., Malaysia, Vietnam, and India, with plans to expand manufacturing capacity to over 25 gigawatts by 2026.

First Solars two core operational offerings are project development and O&M (operations and maintenance). Project development covers all aspects of the process, from site acquisition and permit processing to financing and project management. O&M services provide revenue streams from servicing both its own developed solar power plants and third-party installations. These services include performance monitoring, ensuring optimal operation, and maintenance services to enhance energy production and system lifespan.

In light of the upcoming 2024 U.S. Presidential election, many investors are questioning the volatility of solar stocks, including First Solar. Given Trumps endorsements from several technology investorsincluding Elon Musk, who plays a central role in the green transitionI do not see much medium- to long-term risk from either a Democratic or Republican nominee in the White House. However, in the short term, a Republican win could trigger market panic, inducing volatility in First Solars stock price as the market assesses how supportive Trump would be of incentive structures like the Inflation Reduction Act. I expect this volatility to pass quickly, with First Solars growth resuming regardless of the election outcome.

Notably, the demand for renewable energy to power AI-driven data centers presents a significant growth opportunity for First Solar. Currently, Big Tech companies like Amazon (AMZN), Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Google (GOOGL) (GOOG) represent about 40% of the demand for large utility-scale solar projects in the United States. Additionally, the companys strong domestic manufacturing aligns with the preferences of many U.S.-based tech companies that prioritize local suppliers. First Solar is the largest solar panel manufacturer in the Western Hemisphere focused on utility-scale solar projects rather than residential installations. I consider this to be one of the primary growth drivers that makes a First Solar stock purchase highly appealing.

First of all, one standout element of First Solars financial position is its balance sheet. At the time of this writing, the company has a cash-to-debt ratio of 2.8. While this is substantially lower than its 10-year median of 5.28, it remains strong. With such a robust cash positionfurther supported by an equity-to-asset ratio of 0.66the company is able to offer financially attractive energy solutions, attracting low-cost financing from leading utilities and investors. This solid financial foundation has been key in helping First Solar develop a substantial backlog of bookings, totaling approximately 76 GW as of mid-2024, which provides future earnings and revenue visibility through 2030.

For 2025, I currently estimate 30% revenue growth and 65% normalized EPS growth for First Solar. This outlook is supported not only by the company's strong backlog but also by its increased manufacturing capacity. Despite high capital expenditures for new factories, management has effectively controlled costs. This operational efficiency is a key reason I expect continued strong growth from the company, building on the momentum of the consensus estimate of 35% revenue growth and 68% normalized EPS growth for FY24.

Given the companys P/E ratio without non-recurring items of 18.7, which represents a moderate contraction from its 10-year median of 20.4, this appears to be a viable entry point. Additionally, the companys five-year revenue growth rate of 4.3% highlights the substantially stronger current outlook, which supports an investment decision, especially considering the significant expansion in its PS ratio from a 10-year median of 2.5 to 6 today. While the companys balance sheet remains strong, its increasing net debt is reflected in its EV-to-revenue ratio of 5.7, which is considerably higher than its 10-year median of 1.89.

As I consider First Solars P/S ratio to be too high at the moment, I think it is likely that this will contract somewhat in 2025. At a P/S ratio of 5 and with full-year total revenues coming in at my estimate of $5.82 billion, the companys market cap would be $29.1 billion. This would represent a percentage increase of 28.5% from its current market cap of $22.64 billion.

This is indeed a strong near-term return, and looking forward over a longer time horizon, I believe solid annual returns can also be maintained. Growth in 2026 is likely to be substantially slower than in 2025 due to the immediate boost from its new capacity expansions tapering off, as well as the end of higher demand in 2025, driven by an expected lower interest rate environment. Therefore, if the stock becomes overvalued in 2025 due to short-term enthusiasm, we could see a period of volatility in the latter half of the year. However, I believe this is a great company and one worth owning in the medium term while continuing to assess its long-term prospects and market position.

One major operational threat to consider when allocating to First Solar is that crystalline silicon technology accounts for approximately 95% of the solar market, making it a significant competitive challenge to First Solars thin-film modules, which only represent about 5% of the market. Recent improvements to crystalline silicon, such as Passivated Emitter and Rear Cell (PERC) and bifacial modules, could potentially surpass the performance of thin-film technology in certain conditions.

Moreover, perovskite solar cells are emerging as a promising technology due to their high efficiency and low production costs. Although these are not yet commercially viable, with ongoing R&D, they could become a key competitor to thin-film panels. To combat the threat from perovskites, First Solar is actively exploring tandem technologiescombining different materials, such as perovskites, with traditional thin-film layersto enhance its product offerings.

Looking at the investment potential from a macroeconomic perspective, First Solar is clearly vulnerable to supply chain disruptions and reduced demand for renewable energy in the event of a heightened wartime economy, stemming from escalations in current tensions between the West and Russia over Ukraine, Iran in the Middle East, and China economically, including the underlying tension surrounding Taiwan. I remain optimistic that each of these geopolitical uncertainties will be navigated carefully, but its still important to understand that holding First Solar in portfolios creates exposure to this risk rather than hedging against it. This is true even though management has mitigated this risk substantially by vertically integrating the company.

First Solar is one of the best solar investments I know of. I am very optimistic about its long-term future, and I believe the demand for solar as a predominant form of energy will be enduring. While there may be moments of volatility in demand due to certain macroeconomic trends, I consider First Solars balance sheet strong enough to withstand any temporary hardships that arise. Therefore, while this may be a compelling near-term investment, I encourage readers to consider holding the company in their portfolios for the long run, as the growth horizon for the solar industry is still quite young.

This article first appeared on GuruFocus.