The past twelve months haven’t been easy ones for First Solar, Inc. (NASDAQ:FSLR) shareholders, which is to say, they’ve been downright miserable. FSLR stock is now down more than 50% since late-March of 2016. and is knocking on the door of new 52-week lows.
The superficial explanation is the obvious one — lackluster results from the company, and a disappointing 2017 solar power growth outlook from SEIA/GTM Research. The organization foresees total installations falling 10% this year compared to 2016’s tally.
Still, isn’t the usually profitable First Solar one of the better plays in the business, and isn’t the solar industry still growing? The answer to both question is “yes.” But until a huge bet the company has taken on even has a shot of paying off in 2018, FSLR could remain tough to hold onto.
Time for an Overhaul
Don’t sweat last quarter’s operating loss of $765.4 million … it wasn’t actually an operating loss. The company booked a one-time $729 million pre-tax charge to account for restructuring costs. It’s the reason for the charge, in fact, that could either make or break FSLR. The solar panel market isn’t complicated: Customers want smaller and more cost-effective panels, and they’ll buy from whoever gives them the best bang for their bucks.
For a time, that was First Solar. Given time and motivation, though, other solar businesses, such as Canadian Solar Inc. (NASDAQ:CSIQ) or SunPower Corporation (NASDAQ:SPWR) began to put pressure on First Solar’s aging Series 4 panel architecture.
Series 4 panels aren’t bad panels. The top-performing unit boasts efficiency of 17% … an impressive measure just two years ago. Even the less-efficient panels sport a reasonable efficiency reading of 15.3%. That’s just not enough today. Many of Canadian Solar’s panels boast more than 17% efficiency, and SunPower has eclipsed the 24% mark (albeit it at a noteworthy cost).
First Solar’s choices were limited: make a better product or be beaten by better competition. It chose the former.
Meet Series 6
For a short while there was a plan to introduce a Series 5 panel, but in the end that move wasn’t big enough or bold enough. In November, First Solar opted to skip the 5 altogether and accelerate the rollout of its Series 6 modules. That’s been a costly endeavor so far, however — $729 million last quarter alone.
The science of the Series 6 isn’t new. What is new, is a manufacturing approach that allows for larger solar panels and lower operating cost — about 40% less per watt, in fact.
Perhaps more important is that these new Series 6 solar panels could be more than 18% efficient from their launch. That number can be tweaked going forward, too, as the company learns more about the process. That should make FSLR plenty competitive in terms of size and cost against other solar panel manufacturers.
The catch? First Solar won’t begin making commercial Series 6 panels until the second quarter of 2018. They’ll be worth the wait. The question is, will consumers — or investors for that matter — remain patient?
Bottom Line on FSLR Stock
It’s rare for such a binary event to take shape outside of the biopharma arena, where a drug’s approval can catapult a stock, while an FDA rejection can send it careening off a cliff. First Solar’s transition to the Series 6 isn’t binary in the sense that decisions will be made in an instant, as they often are for biopharma names. Still, it is something of an all-or-nothing gambit for First Solar, and by extension, for FSLR shareholders.
It may be worth it, but a lot can happen in a year. One of the chief concerns is that a competitor will figure something the science behind more robust PVs, leaving First Solar not just going down a long path, but the wrong one. The company is oddly “all in” on the Series 6.
Win, lose or draw, the market isn’t apt to keep FSLR stock propped up more than they have to, knowing the company’s top and bottom lines are going to be suppressed during this major overhaul.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
