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Ishan Majumdar
Ishan Majumdar
Articles (115)  | Author's Website |

First Solar: A Lucrative Macro

Lower cost of producing solar power, improved storage capabilities and investments in technological improvements

April 29, 2020 | About:

Advancements in solar energy over the past few years have resulted in it becoming a highly feasible source of energy for many commercial as well as residential applications. The progress in this sector has been truly remarkable, and many listed players such as SolarEdge (NASDAQ:SEDG) have already seen their stock price multiply in the past three years.

Given the strong macro environment, it could be hard for investors to find a promising growth stock that is not trading at sky-high valuations. However, one such company within this space that has gone through a transition phase and is trading at surprisingly low valuations is Arizona-based First Solar Inc. (NASDAQ:FSLR). The management of this company has heavily invested in the future of solar energy and it has expanded its capacity significantly, paving the way for potential top-line growth.

What does First Solar do?

Founded in 1999, First Solar, Inc. is engaged in the provision of photovoltaic (PV) solar energy solutions in the U.S. as well as abroad. Its main clients include integrators and operators of PV solar power systems to whom it provides various kinds of solutions ranging from PV solar modules (using a thin-film semiconductor technology) to project management, engineering, procurement, maintenance and all forms of services related to the systems.

In 2019, the company chose to exit the engineering, procurement and construction (EPC) business, which they found it to be capital intensive and which was not their primary focus. Since then, the company has begun to concentrate on scaling, developing and selling modules. The company is currently being led by CEO Mark Widmar and is headquartered in Tempe, Arizona.

Reducing cost and better storage for solar energy

Solar power was once considered one of the most expensive sources of energy with a cost of over $350 per megawatt, way back in 2009. However, an increasing need to produce energy through clean sources and minimize fossil fuel emissions resulted in companies like First Solar, SolarEdge and others building technologies that have brought down production costs significantly.

According to Lazard’s 2018 research, the cost of producing solar power is as low as $50 to produce one megawatt-hour of solar power. In comparison, coal energy costs as much as $102 per megawatt-hour. The consumption of coal across the globe is expected to decline sharply in the coming decade, resulting in a significant increase in the potential market for solar energy.  In fact, in many scenarios, alternative energy costs have decreased to the point that they are now at or below the marginal cost of conventional generation.

Another distinctive improvement is the advent of high-quality energy storage systems which can be combined with intermittent forms of electrical generation such as solar and wind energy. Not only can the products today absorb and generate better solar power, but they can function well during times of bad weather, cloudiness, storms, lengthy periods without sunlight, and so on. This is one of the major factors boosting the competitiveness of solar energy production.

First Solar’s investments in technological improvement

The rising demand for solar panels has resulted in First Solar managing to fully utilize its current capacity within its new Series 6 module. Over the last several years, the company has been investing heavily in its next-generation Series 6 module and its technology. The company incurred negative cash flows due to large investment in the Series 6 module and other one-time costs, and this is the reason why it had a weak financial performance in 2019. It was a year of transition for First Solar, which saw rising demand for its new Series 6 panels.

The management has gradually been moving away from its old Series 4 technology and looks to focus only on the new Series 6 module from 2020, where it has a production capacity of 5.5 gigawatts. Overall, First Solar is nearing the end of a major capital deployment period for the purpose of capacity expansion, which I believe should lead to a big jump in revenues and profitability.

Key takeaways

First Solar has definitely shown some recovery after the recent market crash, but it trades well below the 52-week-high and at multiples that are among the lowest in the solar industry. The stock is currently trading at an Enterprise-value-to-sales multiple of 0.95 and a forward price-earnings ratio of 13.38, which are significantly below the industry averages. While it has been struggling to reach a positive net margin, another important factor in its favor is that it has very low capital gearing with a debt-equity ratio of only 0.12.

These valuations, coupled with the solid macro-economic outlook, mean that First Solar could have a bright future. 

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

Visit Ishan Majumdar's Website

Rating: 4.0/5 (1 vote)



Praveen Chawla
Praveen Chawla premium member - 4 months ago

Earnings are very erratic. Where are you seeing the growth?


Ishan Majumdar
Ishan Majumdar - 4 months ago    Report SPAM

The chart you posted is on historical data.

Obviously, the historical performance has been mixed which is the reason why the stock is cheap. We are looking more from a futuristic standpoint.

Our approach is to look analyze future growth using 2 factors:

1 - The solar macro - which is undeniably strong. The industry as a whole is expected to witness a double-digit growth and we expect this to be passed on to companies like First Solar.

2 - The management has invested in capacity growth and in new technologies. This shows that they have actually planned for a higher requirement of its solutions and acted accordingly. Even if you go through the earnings call, you will figure that there is a definite confidence that future demand is going to be high which is why they shifted to the Series 6 module.

Also, since FSLR is cheap, it has much greater scope for growth + multiples expansion as compared to others like SEDG which have already multiplied 6x and 7x in 3-4 years.

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