Renewable energy is the way of the future but technology to tap renewable sources for commercially viable production of energy is still mostly in early stages. As an industry, companies working with solar energy, such as First Solar Inc. (FSLR, Financial) or SunEdison Inc. (SUNE, Financial) are among the fastest growing in the world, especially keeping in mind the low base from which it began. Therefore, while it is an industry that promises to give good returns to investors on their money, those investing still need to pick and choose the specific companies they decide to bet on. First Solar has recently been in the news but is it worth buying?
A new yieldco
The company has seen a 20% surge in its stock price since February this year when it announced the creation of a yieldco in a joint venture with SunPower Corporation (SPWR, Financial). Currently trading around $60, most of the gains in the stock came in the first couple of days after the announcement, which signals a specific event-based boost to the stock price, not something that can be sustained over the long term necessarily. When seen from a longer term perspective, the stock has fared badly, down over 15% since its 52-week high and even worse, down over 65%, from its 5-year high of US$ 168 in February 2011.
The Indian foray
India has been trying to expand its solar capacity rapidly, and in February, First Solar announced plans to set up 5000 MW of solar power generation in India by 2019. The government of India plans to install a total of 100,000 MW of solar power by 2022, more than 30 times its current capacity, and that could translate in to very serious opportunity and money for First Solar. However, CEO Jim Hughes has said that local circumstances make it difficult to develop projects there, referring specifically to land acquisition, financing and power purchase agreements with buyers. So this deal, while big on paper, is not very easy to translate in to real equivalent action on the ground.
New technology
The company is making a transition from lower-efficiency cadmium telluride in its solar cells to using higher-efficiency silicon modules. While great for long term efficiency and productivity, it will have a financial impact in the short to medium term. Also, First Solar has produced its first batch of crystalline silicon photovoltaic modules in January this year in its Malaysian plant. The plant has an annual capacity of 100 MW, but these thin-film modules are expensive and may not appeal to developing countries, such as India.
Cheap conventional energy sources
The fall in oil prices, which are near historic lows for months now, has led to some adverse impact on stocks such as First Solar, but this phenomenon is one that cannot last for a long time because unlike solar power, oil is most definitely a finite source. Low natural gas prices are also expected to have a minimal impact on demand for solar power. Therefore, low oil or natural gas prices shouldn’t be a cause for concern to long term investing in solar power companies.
Conclusion
Keeping in mind the positives for the industry in general and First Solar in particular, and weighing them against the problems, both real and potential for the company, we recommend a HOLD on it. However, if the stock price slips below $55, we would recommend exiting the stock.
