FSLR - First Solar: Valuation Will Inhibit Long-Term Returns (Rating Downgrade)

2024-06-21 09:49:21 ET

Summary

• First Solar is one of the leading solar power investments with heavy traction in the U.S. utility-scale market. Its thin-film technology stands out against traditional silicon panels.
• The company has delivered exceptional growth and margin expansion recently. However, its results are cyclical, and the valuation might reduce significantly due to financial contractions later.
• Over the long term, I posit that solar energy adoption will continue exponentially due to cost competitiveness and green energy trends. My resultant 20-year price CAGR target is roughly 11%.

I first covered First Solar ( FSLR ) in April; I allocated a Buy rating at the time, and since then, the stock has gained roughly 47.5% in price. Now, I consider the stock to be fairly valued at best, if not overvalued, which is why I am downgrading my rating to a Hold. I am doing this despite my very positive long-term outlook on First Solar. I believe over the next decade, it is likely to deliver strong price returns, primarily a result of the global increase in solar energy demand, low solar energy cost per kWh and increased dependence on solar energy to power AI infrastructures. However, there may be periods of high volatility due to the uncertainty in macroeconomic conditions alternating between favorable and unfavorable for solar power companies.

How First Solar Might Develop

In my opinion, First Solar might benefit from growth in international markets, a growth catalyst that may be currently undervalued by investors. Management is aggressively expanding manufacturing capacity globally; this includes a new facility in India with a 3.3 GW capacity, an indication that the firm intends to cater to international demand. The demand for solar energy is increasing globally amidst rising concerns about climate change—there is, therefore, a vast potential market for First Solar's products. Contributing to the potential opportunity in markets outside the United States is that the company offers thin-film panels, which have a lower carbon footprint and water usage compared to traditional silicon-based panels. ...

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