First Solar (NASDAQ:FSLR) is one of the main players in the U.S. solar industry and has an increasingly strong footing in 45+ countries. With solar becoming an ever more important part of the global energy equation, First Solar is well-placed to take advantage of market tailwinds. The company is also expected to see significant capacity come online and with the wind-down of series 4 solar panels and with the move towards series 6 and 7 panels, the company should see revenue and profitability gains. Carbon emissions are a well-known issue, and with fossil fuels increasingly becoming controversial, solar panels will play a key role in the energy mix.
First Solar remains one of the primary names in the U.S. and global solar market. Market research analysts expect that the solar industry could grow at a pace of 20% per year over the next 5 years and is projected to reach $223 billion in sales by 2024, up from $115 billion in 2019.
First Solar is one of the most prominent solar manufacturers globally. The company is currently in the process of rolling out its series 6 and series 7 modules, for which it will significantly increase capacity in the next couple of years. The current manufacturing capacity, which is around 10 GW, is set to expand to 15 GW over the next couple of years, which will include their latest series 7 modules which have both higher efficiency and life-cycle. First Solar has been largely on the back foot as supply chains mainly out of China were affected due to COVID. In 2022 a lot of that supply chain started to open up and a record number of orders are now on the backlog, which makes the future much more brighter than it was a few quarters ago. The anticipation of opening up has resulted in the stock rising significantly after declining in 2021.
Series 7 Modules
The series 7 modules, which are made from Cadmium Telluride, have an efficiency of 19.3% and a life cycle warranty of around 30 years of linear use. Although with the new technology, lifecycles for solar panels with over 80% capacity can be closer to 60-80 years, it also has one of the if not the lowest degradation rates in the industry at 0.3%. The series 7 allows for higher watts as well, coming in at a total of 540 watts. The series 7 modules are a slight improvement over the previous modules, but not significant enough for any real excitement, except for larger solar panels.
Margins
Margins have been on the downturn once again, with profit margins falling from 8% to around 3% in the recent past. This does not bode well for the stock, as the company has a history of poor profitability. Considering the investment, and outlays, the expected margin was around 7-8% if not higher. As First Solar looks to enter a new era, where previous impairment costs are no longer an issue, cash flow should come back slowly. Previously lower average selling price and volume, stemming from shipping and supply chain issues, which weighed on margins, may no longer be an issue. Since then, the company has done well to reduce and mitigate these risks, thereby allowing for more sustained margins. Furthermore, the cost per watt should reduce by anywhere from 3-5%, which should help reduce some of the increasing cost escalation, which has plagued the profitability in recent times. The cost of production has fallen from $0.25 per watt to $0.13 per watt, which should help the company compete against traditional forms of energy. Going into 2023, the addition of the new facilities should also help the company significantly ramp up production, and meet its backlog. In turn, this should help sales significantly as the company looks to fill its backlog.
Investments in Solar in 2023
Investing in renewable energy will continue to be strong for 2023, with an increase in spending by as much as 20%. This should help First Solar which has been facing significant issues on the supply chain side of things, is set to now benefit, as both the multi-year backlog, increasing capacity, and lower production costs, could make 2023, a breakout year for solar. The EU installed 47% more capacity in 2022 compared to 2021, although a lot of that was the base effect stemming from COVID shutdowns. While an increasing amount of solar installations are focused on rooftop installations, there is still a need for solar installations to provide general grid-based electricity. The inflation reduction act is another major source of capital for solar projects, and more and more countries around the world will demand solar installations. But headwinds remain in terms of logistics, and individual consumers, who make a significant portion of the market, are primarily investing in rooftop solar.
Regardless, there is significant capital coming in from governments, and this puts First Solar in a position to significantly increase its revenue by anywhere from 20-25%, in 2023, and with the supply chain issues stemming from shipping delays, the company is all but set to return to margins that should help the company get back to historical profitability levels. This means that revenue could come in anywhere from $3.4-$3.5 billion, as capacity and backlog, means that utilization rates which currently stand at around 95%, continue to run at similar levels. Assuming that previous one-off costs are no longer an issue, this would mean that margins should return to around 6-7%, which would put net profit at around 200-250 million. This would equate to a forward P/E would be around 60-70 times earnings. This would put First Solar at a slightly higher rate than one would prefer.
On the other hand, the high valuation creates risk for the stock, especially if the results don’t come in as expected, either due to revenue or due to margins, then there could be a correction. First Solar has a history of volatility, and that volatility has been especially heightened over the last couple of years, and that’s mainly due to previous issues. So investors will be cautious of any negative news and may pull back if the results don’t live up to their expectations.
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