First Solar Inc (FSLR, Financial) has recently seen a daily gain of 1.71%, despite a 3-month loss of -10.13%. With an Earnings Per Share (EPS) of 1.46, the question arises: is the stock significantly overvalued? This article provides a comprehensive valuation analysis to answer this question.
First Solar designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects. The company's solar modules use cadmium telluride to convert sunlight into electricity, a process known as thin-film technology. As the world's largest thin-film solar module manufacturer, First Solar has production lines in Vietnam, Malaysia, the United States, and India.
Understanding the GF Value
The GF Value is an estimate of a stock's intrinsic value based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
If the stock price is significantly above the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Considering these factors, First Solar's stock is estimated to be significantly overvalued. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage can provide valuable insights into the company's financial health. With a cash-to-debt ratio of 3.9, First Solar's financial strength is strong, ranking better than 59.98% of 897 companies in the Semiconductors industry.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, poses less risk. First Solar has been profitable six times over the past ten years. Despite its operating margin of 3.39% ranking worse than 61.58% of 937 companies in the Semiconductors industry, its profitability is fair.
Growth is a critical factor in a company's valuation. The faster a company grows, the more likely it is to create value for shareholders, especially if the growth is profitable. First Solar's 3-year average annual revenue growth rate is -5.5%, ranking worse than 82.68% of 866 companies in the Semiconductors industry. However, its 3-year average EBITDA growth rate is 36.7%, ranking better than 68.14% of 769 companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can provide valuable insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, First Solar's ROIC is 1.88 while its WACC came in at 11.09.
In summary, First Solar (FSLR, Financial) is estimated to be significantly overvalued. Although the company's financial condition is strong and its profitability is fair, its growth ranks better than 68.14% of 769 companies in the Semiconductors industry. To learn more about First Solar's stock, you can check out its 30-Year Financials here.
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