First Solar (FSLR) is essentially a pure play on both the “front” end and the “back” end of the solar production chain, as opposed to large industrial players that may have a solar arm amid several other product lines. The company makes money from two main businesses: making solar panel components, and also in designing, manufacturing and selling solar modules to project and system developers.
The key customers for this segment are commercial entities and utilities, though FSLR is looking to make inroads into the residential market, too. It is this latter (systems) segment that will help propel the company’s operating results and share price higher.
Along with the rest of the industry, First Solar has had its own woes in the past few years, with shares reaching as much as $300 in 2008 before plummeting to $11 last year. But much like its sector mates, FSLR is in the midst of an attractive turnaround, and the stock has rebounded nicely to around $40.
It’s important to realize that much of the company’s slide over the past five years has been tied to FSLR’s presence in the module market, where its “thin film” solar technology (where less material is used to make more flexible panels at a lower cost) was sold to third parties, but became subject to a rapid drop in commodity prices. The company was also tied in to Germany’s solar power industry, which was among the leading countries (along with Spain and Italy) in adopting solar technology. These countries relied heavily on government subsidies to spur increased adoption of solar energy, and once Europe’s debt problems hit, those subsidies started to dry up.
However, FSLR has been diversifying away from Germany, where it once got as much as 65% of its revenues. Today, First Solar gets nearly 90% of its revenues right here in the United States. Where Europe once dominated the sector, recent numbers from industry analysts show that the U.S. solar market is indeed quite healthy and gathering steam. The U.S. share of global installations now represents 13%, which is up from 5% just five years ago. The Solar Energy Industries Association estimates the United States’ PV installations for 2013 will be up 30% from last year, and some analysts believe U.S. installations will double through 2015.
While this is an outstanding outlook for solar growth, the industry still deals with price competition. Installation prices continue to fall, as does the cost of selling the modules to installers themselves. Competition from China also has a role in pushing top lines and margins down across the solar food chain.
FSLR is not immune to this (gross margins have declined from a 60% peak to 27% today), but has weathered the pricing storm better than most. It has brought down the manufacturing cost of its modules from more than $1 a watt to about $0.67 a watt today, and that does indeed help margins. Critics may snipe at the efficiency disparity between thin film and more conventional polysilicon-based solar panels, where the percentage measures the efficiency or conversion of sunlight’s energy to electricity – for FSLR that ratio is about 15%, for other technologies it’s about 18%. But because the company can control its costs and lower its pricing, it can get its panels designed into large-scale solar projects.
As you might expect, declining “input” prices, including the cost of the technology that goes into the panels, means cheaper prices for the actual systems, and this in turn means more systems sold. First Solar clearly recognizes this, as it has focused on solar power systems. This segment represents 90% of FSLR’s top line, while the module business is 10%. Management has made sure it’s on the value-added side of the solar industry, and closer to the customers who actually use and install the power.