FSLR - First Solar: 180% Rally In 9 Months Has Priced In Anticipated Growth Tailwinds

2023-05-03 09:46:37 ET

Summary

• The stock has already rallied 180% in just 9 months. I believe the market has already factored in potential growth opportunities.
• Investors may need to reset their expectations after disappointing 1Q results, and wait for more clarity on the final guidance of IRA.
• Competitors would benefit greatly from a significant drop in the price of silicon, as it would lower their input costs.
• I hold a bearish rating on the stock and intend to look for better opportunities at lower price levels.

Investment Thesis

First Solar Inc. ( FSLR ) has emerged as a leading photovoltaic ((PV)) supplier, with its stock soaring 180% since the approval of the Inflation Reduction Act ((IRA)) in July 2022. The company has projected strong growth opportunities in the US solar energy market, expecting a 15% CAGR of installed solar generation capacity over the next five years. However, investors may reset the expectations after disappointing 1Q earnings results, with a 23% and 61% miss on revenue and GAAP EPS, respectively. Although some investors may argue that First Solar is a great company with excellent products and strong long-term growth prospects, I believe that holding FSLR comes with a higher opportunity cost compared to its peers at present. The stock has already priced in the expected tailwinds from the IRA, as supported by its nearly triple rally in less than 9 months. Therefore, from a risk and reward perspective, I hold a sell rating on FSLR.

Company Description

First Solar is a leading provider of PV energy solutions, known for its advanced thin-film semiconductor technology that produces high-performance, environmentally friendly PV solar modules. As the world's largest manufacturer of thin-film PV solar modules and the largest PV solar module manufacturer in the Western Hemisphere, the company has a strong market presence. The U.S market accounted for 84% of 2022 net sales. The U.S currently has an installed solar generation capacity of approximately 140 GW, which is expected to double by 2027 due, in part, to the economic incentives provided by the IRA.

Competitive Advantage: CdTe

First Solar's PV solar modules use a single-junction polycrystalline thin film semiconductor structure that incorporates Cadmium Telluride ((CdTe)) as the absorption layer. This technology offers several advantages over competing crystalline silicon technologies. First, it delivers superior performance in high isolation climates. Second, it exhibits a better partial shading response than competing technologies. When partial shading occurs, crystalline silicon technologies often experience significantly lower energy generation than CdTe solar technologies.

1Q23 Takeaway

FSLR reported 1Q results well below expectations , with revenue of $548.29m missing consensus estimates by 23% and GAAP EPS of $0.4 falling short of consensus by 61%. However, the company's FY 2023 outlook remains unchanged, and it has sold out its backlogs through 2026. While total bookings reached 71.6 GW through 2029, 1Q net bookings decelerated to 9.9 GW from 14.5 GW in 4Q. Despite this, ASP trends remain intact, increasing $0.01 per watt QoQ from $0.308 per watt in 4Q. In addition, Series 7 started producing 170 MW in 1Q. In addition, Series 7 started producing 170 MW in 1Q. The company maintains a healthy balance sheet, with net debt (total debt minus cash and marketable securities) having been negative since 2019.

A Potential Overhang

FSLR is waiting for tax provisions issued by the U.S Treasury Department. This will finalize the objectives of the IRA and measure the magnitude of tax benefits, as the company mainly manufactures solar cells in the U.S. In the earnings call , the CEO, Mark Widmar, stressed, "We believe it is imperative that the United States Treasury Department issued guidance consistent with the congressional intent of the IRA, which is to nurture true domestic solar manufacturing, ensuring a robust domestic supply chain for American made solar modules. It is critical the guidance recognized that to qualify for the bonus." If the U.S Treasury Department issues more restrictive guidelines on the definition of a US-made solar module, it could be a positive for FSLR. The company is already a leading U.S. solar manufacturer and has the potential to benefit from a tighter definition that would make it more difficult for competitors to qualify for the benefits. This could lead to FSLR announcing further manufacturing expansion and potentially lengthen their runway before competitors can catch up. On the other hand, if the guidelines are less restrictive, it could be a negative for FSLR. This could potentially lead to increased competition and lower pricing pressure, which could impact FSLR's near-term sentiment. Therefore, I believe that the outcome of the U.S Treasury Department's guidance on the definition of a US-made solar module will have a significant impact on FSLR's future performance.

Price Competition

The recent sharp drop in the price of silicon metal will not benefit FSLR as the company relies on CdTe instead. The metal silicon price indexes in major countries have been plunging since the beginning of 2023, with the US index dropping by 23% YoY from 3.41 in April 2022 to 2.61 in April 2023. Polysilicon prices have also dropped approximately 23% from the recent peak. As 98% of FSLR's revenue comes from solar modules in 1Q23, up from 84% in 4Q22, the opportunity cost of relying on CdTe is increasing relative to its competitors. If this downward trend continues, FSLR will lose its competitive advantage on pricing, while competitors will benefit from expanding gross margins due to lower input prices.

Valuation

Some investors may be comfortable with FSLR's valuation multiples, such as the lower P/E multiple of 27.7x CY23 compared to the group average of 32.1x, and the higher EV/Revenue multiple of 5.7x CY 2023 (as of 04/24/2023) compared to the industry average of 3.4x. I admit that FSLR may not pose significant valuation issues compared to ENPH's higher multiple of 8.9x. However, I believe that FLSR's valuation multiples may be justifiable at the current level, which doesn't necessarily mean it's very attractive. According to the revenue growth in the last 3 years, FLSR was not a high growth company as the company only had -5% of CAGR from 2019 to 2022, compared to EMPH's 55% CAGR. If we include the mid-point of the company's 2023 revenue guidance, the CAGR would be only 3.4% from 2019 to 2023. Moreover, the company was unprofitable with a net loss of $0.41 per diluted share in FY 2022. You will find out that FSLR is currently trading at a PE TTM of 462x. Therefore, a stock rally of 180% since June 2022 was trading entirely based on the future expectations under IRA tailwinds.

Conclusion

While FLSR has potential for strong growth in the next few years due to tax benefits and demand for solar energy, I believe that these tailwinds have already been priced into the stock, which has rallied 180% since the approval of IRA. Despite some investors viewing FLSR as a safe bet due to locked-in backlogs until 2029, I believe this is already reflected in the current price. While recurring bookings can translate to its future revenue, I'm cautious that investors are buying based solely on its future expectations, particularly after disappointing 1Q results. As a result, I believe the market may reset its expectations, and again, from a risk and reward perspective, I'm bearish on the stock and waiting for opportunities at a lower price.

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