Deep Dive – $FSLR : Empire of the Sun

by Enis September 30, 2013 12:45 pm • Commentary

First Solar is another roller coaster stock.  I am fascinated by stocks like these because the market’s perceived value of these companies has changed so rapidly from year-to-year.  That volatility indicates that traders and investors have a very hard time appropriately valuing such a business.


Look at the lifetime weekly chart of First Solar:

FSLR Weekly, Courtesy of Bloomberg
FSLR Weekly, Courtesy of Bloomberg

The stock IPO’ed at $20 in late 2006, reached $317 at its height in 2008, and then traded as low as $11.43 in June of 2012.  The stock’s high this year is $59.  Talk about a big range over the past 7 years.

The 2 most notable idiosyncratic moves during this period were:  

  1. The parabolic run higher in 2007 – excitement about burgeoning solar power projects around the world led to fantastic growth forecasts for FSLR, the first mover in thin film solar modules (as opposed to the polysilicon modules used by most of the industry)
  2. The decline from $175 to $30 in 2011, a disastrous performance the result of 2 main culprits: First, there was a major decline in demand from European governments, who were forced to cut their solar subsidies as part of their austerity programs.  Second, solar module pricing declined sharply as well as Chinese capacity flooded the market.  It was a double whammy on both the demand and supply sides.


Since 2011, the market has gradually come to accept a more-U.S. focused solar environment, not just for First Solar, but for the industry as a whole.  FSLR shuttered its manufacturing plant in Germany in 2012, and the company’s restructuring has finally paid off for investors in 2013.  The company’s downsizing has dramatically altered growth prospects (FSLR is expected to earn less in 2015 than it did in 2008), but valuation was hit so hard that the stock became attractive to value players (still only a 10 P/E stock).

At this juncture, what’s FSLR’s competitive advantage?

The company’s management cites its major operational goal in its recent 10-Q:

In furtherance of our goal of delivering affordable solar electricity, we are continually focused on reducing PV solar power system costs in five primary areas: module manufacturing, BoS costs (consisting of the costs of the components of a solar power system other than the solar modules that we manufacture, such as inverters, mounting hardware, trackers, grid interconnection equipment, wiring and other devices, and installation labor costs), project development costs, the cost of capital, and the operating expenses of a PV solar system.

FSLR is the largest thin film solar module manufacturer in the world.  Its total average module manufacturing cost in the second quarter was $0.67 per watt, which is competitive with the major polysilicon manufacturers globally.  However, the manufacturing side of the solar business is extremely competitive (with Chinese manufacturers frequently the cheapest), so FSLR’s current advantage is in its vertical integration.

FSLR is one of the few solar module manufacturers that also plans, finances, constructs, and then maintains utility-scale solar projects (what FSLR refers to as its “systems” business, as opposed to just selling its solar cells to others).  SPWR and SUNE are two other U.S. companies in that space.  Many of the other global players are focused on a few steps in that process, rather than the whole set of needs to get a utility-scale solar plant up and running.

The company’s long-term strategic plan rests on moving away from being subject to the whims of solar module pricing globally.  The company’s main systems projects are all based in California, with 4 large projects accounting for the bulk of its expected installed capacity:

Project Size in MW AC (1)
Power Purchase Agreement (“PPA”)
Third Party Owner/Purchaser
Expected Year Revenue Recognition Will Be Completed By
Topaz, California
Desert Sunlight, California
NextEra / GE / Sumitomo
Agua Caliente, Arizona
NRG / MidAmerican
AVSR, California

Valuation and Macro Environment:

Perhaps most relevant to FSLR’s prospects over the medium term are not its idiosyncratic pipeline.  It’s the global market environment for solar demand and solar pricing.  The major solar companies are all bidding on projects around the world, with cost the biggest determinant of who wins each project.  Solar demand has finally started to grow again for the first time since 2010, and the decline in solar costs over the past 3 years has made solar power much more competitive with traditional power plants.

In that sense, a bet on FSLR is a bet on solar overall.  However, FSLR is still a company trying to pick itself up off the mat.  It’s expected to earn $3.92 per share in 2013, $3.30 in 2014, and $3.62 in 2015.  Unless solar pricing and demand accelerates rapidly, FSLR’s 10 P/E doesn’t look so appealing if there is no earnings growth for the next 2 years.  Especially considering the risk of a drop-off in demand if projects get shuttered in a more difficult macro environment (particularly from a financing perspective).

FSLR is the cheap valuation among the major solar stocks, but competitors like SPWR have better growth prospects at the moment.  The 3rd and 4th quarters are the most volatile for the sector, so the next round of earnings in early November should be the catalyst for the sector’s next direction.