The storm clouds seem to be sticking around for the solar industry. First it was the now-defunct SunEdison Inc (OTCMKTS:SUNEQ). Then it was warnings on SunPower Corporation (NASDAQ:SPWR). Now the storm clouds have started to cover solar panel and utility-scale giant First Solar, Inc. (NASDAQ:FSLR).
FSLR stock is down big today despite a great earnings beat. That’s because, of course, First Solar tucked some bad news into its latest report.
However, while that news shouldn’t derail the solar energy firm over the long haul, it does cast some pretty long shadows over FSLR’s business model and ability to generate growing revenues over the next couple of quarters.
For First Solar stock holders, that could spell trouble. In fact, that could spell trouble for a number of other solar shareholders, as the sector often goes as FSLR predicts.
So will FSLR stock ever make money for you again? Well, it depends on your timeline.
A Big Asterisk for First Solar
On the surface, First Solar’s results should draw cheers. The solar panel producer and builder of large-scale energy projects managed to report a huge 48-cent-per-share beat. That’s Goldman Sachs Group Inc (NYSE:GS) “God’s work” kind of profits, and is impressive for a solar firm.
But things aren’t right at FSLR. A real storm is brewing, and it comes down to panel prices.
The solar industry often falls victim to supply gluts. Like the last time we saw a huge run-up in panel supply, China is to blame. However, instead of dumping thousands of cheap panels on the market, this time it’s demand that’s the key.
Put simply: Demand isn’t there.
China’s demand is plunging, and panel prices have followed suit. Over the past seven months or so, panel prices have decreased by just less than 30%, and that’s cramping FSLR’s revenues.
In fact, that price decline is forcing First Solar to walk away from some money-losing utility-scale solar projects. This quarter, FSLR saw its revenues shrink by 45%, and the company now expects full-year sales in a range of $2.8 billion-$2.9 billion, down from early estimates of $3.8 billion-$4 billion.
This also is causing First Solar to accelerate the introduction of a cheaper, more competitive solar module.
First Solar is known for its more efficient panels. These panels cost more up front but capture more sunlight over the long haul. That ultimately reduces costs and profitability of projects. But with “regular” panels being so cheap, FSLR’s high-efficiency panels don’t make a ton of sense for developers right now.
Needless to say, the lower outlook could be a major problem for First Solar.
Then again, it might not be.
FSLR Stock Has a Big Umbrella
The thing is, solar investing is a very long-term prospect. Investors typically are focused on the future, whether it’s long-term profit forecasts or rising solar adoption. So guidance like First Solar’s certainly is troubling.
But things might not be as bad as today’s drop in FSLR stock suggests.
For one thing, First Solar still is immensely profitable, and its margins continue to grow. This quarter, margins clocked in at 25% to 26%, up from 18.5% last year. Moreover, FSLR has ample liquidity and features a relatively low debt profile.
More importantly, the bulk of First Solar’s customer base is till utilities and major power providers, not mom ‘n’ pop rooftop firms. A major utility has a different set of mandates — thanks to regulation and tax advantages — than individuals. When they commit to a project, it usually gets done, and that should help FSLR long-term.
Additionally, First Solar’s rollout of Series 5 and 6 solar panels will deliver higher efficiency for lower cost. Given that a utility is buying a project for the long haul, the collapse in panel prices might not matter too much. They have a longer payback period anyway.
This isn’t a case of SunEdison Part Deux. Not in the slightest. And the 40% drop in FSLR stock could be a huge gift for long-term investors.
Will FSLR Stock Ever Make You Money Again?
The answer is yes. Share prices just need to reflect reality, not the pessimism that’s more than baked in right now.
The drop in panel pricing and revenues is troubling, for sure. But this looks more like a short-term blip considering First Solar’s focus and project rollouts. In the end, if one company is going to make it through the malaise, it’s First Solar.
If FSLR stock falls much further, I’d be seriously inclined to consider buying. Its long-term prospects still look good.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.