First Solar Inc. (FSLR, Financial) is one of the largest and most well-known players within the solar photovoltaic manufacturing space. The company has been in the process of transitioning back to its core business of manufacturing solar modules using its unique thin-film technology, which usually tends to have a higher yield in hot and humid climates than the more easily available crystalline silicon modules.
The company’s quarterly results have been good, but the stock has fallen along with the broader markets. However, it is difficult to determine whether it is the correct time to invest in the stock. Let us take a closer look at its operations.
First Solar has been gradually transitioning its strategy. The company exited its North American development and operations and maintenance businesses in 2021, returning to its roots as a thin-film solar module manufacturer. From 2012 to 2017, when the module business was struggling, the company's development business supported profits. However, given the growing need for scale, First Solar’s management team seems to have made the right decision to exit the development business.
The company announced plans to shut down its Japanese development operations in early 2022, completing its transition back to a pure-play module supplier. Furthermore, its sales efforts have shifted to focus on a smaller number of end markets. Nearly 90% of booking opportunities are in the U.S. and India, where policies put the company in a better competitive position. The company excels in the utility-scale market in the U.S. with a near 30% market share. In terms of finances, it is focusing on leveraging scale benefits to improve margins. Given continued expectations for lower selling prices and a large fixed operating expense profile, capacity additions are a key lever for increasing operating margins.
Divestment of Japanese development assets
First Solar has been divesting assets to improve liquidity and focus on the manufacture of cadmium telluride solar modules that convert sunlight into electricity. One of its recent divestment announcements was an agreement with PAG Real Assets to sell its 293 MegaWatts defined conditions utility-scale solar project development platform in Japan, as well as a solar operations and maintenance platform with around 665 MWDC.
With more than $50 billion in assets under management, PAG is a leading Asia Pacific private investment manager. It plans to integrate First Solar's project development platform into its existing portfolio of solar farms in Japan, making it one of the country's largest renewable energy operators with more than 600 MWDC of capacity. This is not the first divestment deal between the two companies as PAG acquired two 50 MWDC projects under development by First Solar in Japan in 2021. First Solar’s 2024 vision is to double its nameplate manufacturing capacity to 16 GWDC by building two new manufacturing facilities in the U.S. and India.
Strong macro conditions
As per trends analyzed by Grand View Research, there has been increased adoption of solar PV in the U.S. over the past several years. This has resulted from several factors, including lower installation costs, the availability of simple solar financing options and concerns about rising carbon emissions. This, in turn, has also led to other countries around the world adopting cleaner and more efficient energy sources. Supportive government guidelines, incentives and tax rebates for installing residential solar PV systems are also major factors driving adoption.
Due to their large-scale green power requirements, companies in the industrial and utility sectors are among the top users of solar PV. As per Grand View Research, the residential solar PV market in the U.S. is expected to expand at a compound annual growth rate of 5.6% until 2028. The presence of favorable policies and guidelines for net metering and financial incentives in the U.S. drives the market. First Solar is bound to benefit from the favorable macro conditions for solar energy in the future, especially since its unique thin-film technology accounts for only a small percentage of the overall market.
As illustrated in the price chart above, First Solar’s stock has undergone a significant correction over the past six months. There could be some level of pessimism associated with the company selling off its development assets and moving back into the modules business, which has become highly commoditized in nature over the years. From a valuation standpoint, the company is trading at an enterprise value-to-revenue multiple of 2.75 and a price-earnings ratio of 37.28, both of which are above their industry averages.
The GF Value indicator also shows the company’s stock has fallen to reasonable levels. However, all other indicators in the valuation box indicate First Solar’s shares are overvalued. There is definitely some uncertainty associated with the company’s growth in the fiercely competitive modules market as well as the cost per watt in comparison to crystalline silicon competitors. Despite the dip, I believe it is best to avoid First Solar at current levels.