FSLR - First Solar: Huge Demand In Solar PV

2023-03-29 10:10:09 ET

Summary

• First Solar, Inc. is a leader in the solar photovoltaics market because it has innovative technology that provides competitive advantages over other solar PV developers.
• The company focuses on the utility-scale PV market, making it less volatile than consumer sales.
• The electricity generated by solar PV is still small compared to total electricity demand, so there is huge market potential available.
• The IEA expects the solar PV market to grow at a CAGR of 25% through 2030.

Introduction

First Solar, Inc. (FSLR) offers competitive solar photovoltaics ("PV"), mostly utility-scale, making it less vulnerable to changing consumer sentiment. First Solar is well positioned in a growing sector as more governments offer incentives to encourage investment in the solar sector. Most governments aim to achieve a net zero carbon footprint by 2050.

The demand for solar panels is high because gas prices have skyrocketed since the Russia-Ukraine war. Therefore, First Solar's share price has risen along with the strong demand for solar PV this year. The question is whether the share price is currently attractive to invest in.

In my article, I shed some light on the expanding solar industry, First Solar's competitive advantages, and I discuss why First Solar is a high-risk, high-return stock.

The Solar PV Market Expands Rapidly

The renewable energy industry, especially the solar industry, has grown strongly since the Russia-Ukraine war . Persistent problems in the Russian natural gas pipelines to Europe have sent natural gas prices skyrocketing. Russia was one of the largest exporters of natural gas, but Europe has begun to turn away from Russian gas. Until 2021, the share of Russian gas in Europe was about 50%, but that has shrunk to about 10% currently. Despite Russia's reduced market share, natural gas prices rose from about 10 euros in 2020 to the peak of 340 euros in 2022.

Various government measures and incentives (such as the net zero target by 2050 ) have led to increased use of alternative energy sources in an effort to move away from Russian natural gas supplies. Therefore, the total addressable market is quite difficult to determine, as incentives can change. IEA , the International Energy Agency, described that the global solar PV market will increase with 22% to 1003 TWh by 2021. The global solar PV market accounts for only 3.6% of global electricity generation and remains the third largest supplier of renewable electricity after hydro and wind power.

Solar power still has great growth potential, as the IEA expects solar PV use to increase from 1003 TWh to 7414 TWh in 2030, representing strong growth of 25%. This growth is equal as the CAGR during the past 5 years. Utility-scale plants account for 52% of the global solar PV, followed by residential (28%) and industrial (19%).

Due to the rising natural gas and electricity prices, investments in solar PV has increased sharply recently. The IEA forecasts that solar PV will be the cheapest energy source by 2025. However, with natural gas prices currently falling and inflation rising significantly, consumers and businesses could be reluctant to invest in solar PV which could slow growth. I believe that with government incentives and due to the goal of being net zero by 2050, consumers and businesses are continually incentivized to invest in the solar sector, which will see strong growth in the coming decades.

Strong Backlog And High Growth Expected

First Solar is well positioned to take advantage of the growing solar PV market, as the company is a world leader supplying PV panels to the utility-scale industry. The company produces solar panels that are more efficient than others in the industry (more usable energy per nameplate watt), so First solar clearly has a competitive advantage. It also operates several utility-scale solar panel projects worldwide.

The full year 2022 was a great year as the outlook is strong with 48.3GW net bookings in the full year, representing a 176% increase over 2021. The company also recorded a huge order backlog of 67.7GW.

However, the beginning of 2022 was challenging due to logistical challenges and higher raw material costs. This led to profits for 2022 turning in the red. CEO Mark Widmar expects 2023 and beyond to be highly profitable thanks to a stronger commercial, operational and financial position in the international launch of its new products (Series 7).

The company has long-standing and loyal customers. I quote from the earnings transcript :

Since the beginning of 2022, large developers such as Intersect Power, Lightsource BP, National Grid, Origis Energy, Savion, Silicon Ranch and Swift Current, among others, have placed orders for at least 2 gigawatts. The fact that many of these transactions are with repeat buyers is an indication of the trust and shared values that underpin our customer relations. And it is a clear differentiator from the most more transactional approach taken by many of our competitors.

These will ensure that the company continues to grow, along with new customers along the value chain. First Solar operates in a growing market and its photovoltaic installations are in high demand. I see good growth in the coming years, and many analysts share the same view: they expect sales growth of 33% by the end of this year and the P/E ratio for 2025 is only 10.

Its Valuation Looks Favorable

First Solar's balance sheet is robust with net cash of $2.4 billion, and earnings expectations are also strong. As I described in the previous section, many analysts expect strong earnings growth in the coming years; 17 analysts have revised earnings upward and only 4 downward. Overall, they expect a P/E ratio of only 10 for 2025, making First Solar a valuable play if earnings turn out well.

Investors should still consider a looming recession as the yield curve is inverted and many regional banks could be in trouble. 3 regional banks are already in trouble due to the strong increase in interest rates. Companies could be reluctant to invest in solar during rising interest rates. Therefore, First Solar is a high-risk stock with a high potential return.

Conclusion

First Solar, Inc. is a leader in the solar PV market because it has innovative technology that provides competitive advantages over other solar PV developers. The company focuses on the utility-scale PV market making it less volatile than consumer sales. The solar PV market is growing rapidly due to various government subsidies and because of the goal of achieving net zero emissions by 2050.

The electricity generated by solar PV is still small compared to total electricity demand, so there is huge market potential available. The IEA expects the solar PV market to grow at a CAGR of 25% through 2030. First Solar is benefiting greatly from this and this is reflected in its net bookings, which have increased 176% this year. The stock is therefore favorably valued on a forward basis, but only if First Solar can deliver on these gains. There are quite a few hitches, as an emerging recession could throw a spanner in the works. So First Solar, Inc. is a high-risk, high-reward stock.

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