FSLR - First Solar: The Risk/Reward Looks Sunny

2024-02-05 07:50:39 ET

Summary

• First Solar is expected to experience significant revenue and earnings growth due to investments in manufacturing capacity and a strong backlog that now extends into 2030.
• The company is taking advantage of tailwinds such as the Inflation Reduction Act and favorable growth opportunities in various regions.
• First Solar faces some significant and serious risks, but these risks are either largely mitigated or unlikely to happen.
• The stock is trading at a reasonable valuation with a modest margin of safety.
• I rate this industry leader as a Buy and plan to own it long term.

Investment Thesis

In spite of my pen name, a non-dividend-paying growth business can still catch my interest if the investment thesis is compelling enough. First Solar (FSLR) is an example of such a business, and I currently rate the stock a Buy because I believe that the current stock price offers a reasonable valuation for a high-quality, high-growth business with some margin of safety.

There are many reasons why I like First Solar and why I recently added to my position. First, the company is expected to deliver significant revenue and earnings growth over the next several years as it invests heavily in ramping up its manufacturing capacity as well as its research & development (R&D) capacity to meet strong demand for its products and technology. These investments are being funded primarily via the company's cash on hand, prepayments from customers, and operating profits which is keeping the company's debt relatively low. First Solar's manufacturing cost structure is also largely fixed, allowing it to take advantage of operating leverage as it ramps up its capacity and sales. Furthermore, the company's backlog is sold out through 2026 and now extends into 2030, securing the majority of its growth in the next several years as long as it executes.

Additionally, First Solar is taking advantage of many tailwinds including benefits from the Inflation Reduction Act (IRA), which is boosting its gross margins and increasing customer demand for the company's products. The company has been divesting its legacy O&M business to focus on its core competency of designing, manufacturing and selling Cadmium telluride (CdTe) solar modules while it continues to invest heavily in innovating and developing new technology as well. In addition to the USA, First Solar is also pursuing attractive opportunities in countries/regions such as India, Malaysia and Europe as some of these regions have and are continuing to enact regulatory, environmental and tax policies that are providing First Solar with favorable growth opportunities....

For further details see: