In a nutshell, First Solar, Inc. (NASDAQ:FSLR) is a leading manufacturer of solar panels, or photovoltaic (PV) solar systems. It sounds simple enough — solar demand is literally booming, and First Solar is a feel-good renewable energy investment. But unfortunately, its investment potential is about as likable as relying on an outdated coal plant as an energy source.
First Solar’s most recent annual report begins with a message from new CEO Mark Widmar. He immediately cuts to the chase and says he looks forward to leading the firm through its current “challenging, yet exciting time.”
Exciting of course because of solar’s vast and growing potential as a clean (and unlimited) energy source.
First Solar’s Opportunities and Problems
The good news about operating in the solar industry is it is growing rapidly. One industry source relayed its expectations for an 11th straight year of increased demand and estimates global demand of 79 gigawatts (GW) for all of 2017. The United States and China are the largest markets. India and Japan are growing rapidly, as are many international markets. Business cycle ups and downs do not currently apply to solar.
Solar energy has many benefits. It is a clean, renewable energy source, can be more reliable and help diversify a home (or business) from having to rely on an unreliable and old national energy grid, and there are tax and other incentives that can help easily justify the cost of installing them. And PV costs continue to plummet, which is great for the consumer.
The challenges that Widmar is referring to are just as pronounced. A huge problem for First Solar (and therefore shareholders) is the industry is fast developing and highly dependent on impressive, but unpredictable technological advancements. Returning again to Mr. Widmar’s words, 2016 was marked by “sudden and dramatic pricing declines, resulting largely from a combination of increasing capacity and weakening demand in certain markets.”
First Solar’s current product line-up is a case in point. It is rolling out a new line of Series 6 PV modules that represent another push forward in terms of efficiency at a lower cost point. Management and analysts hope it keeps the company ahead of the competition, but that continues to grow more difficult.
China’s continued industrialization is proving a big headache for firms that compete in the industries it targets for development, and solar happens to be a big one for the Chinese government. One solar industry analysis estimated worldwide PV panel prices dropped 80% because of China between 2008 and 2013. It is now seen as a global leader because it offered tax incentives for solar developers to come to China. It provided cheap factory labor and let the industry scale to levels not seen before.
So while First Solar and rivals that include SunPower Corporation (NASDAQ:SPWR), Vivint Solar Inc (NYSE:VSLR) and Solaredge Technologies Inc (NASDAQ:SEDG) helped create the market for solar panels, China’s nearly limitless resources are helping it scale and reduce solar panel production costs well ahead of what was originally imagined.
The pace of progress in the solar industry is making it difficult for First Solar to earn adequate returns from the investments it makes. Net income fell off a cliff last year after a very solid 2015. This year, the consensus estimate is for earnings of 54 cents per share, and a steady jump to 81 cents in 2018. These are both a far cry from previous profitability.
Sales are projected to be flat this year at just below $3 billion as the new product line gains (hopefully) traction. But analysts expect a 25% decline in 2018 to only $2.16 billion in sales. This would represent a decline from the $2.6 billion reported in 2010, which only illustrates how rapidly falling prices can make it extremely difficult to grow the top line.
Cash flow trends have oscillated between positive and negative levels for the past decade. Investment periods to develop and release new products are continually met by rivals doing the same and boosting supply while at the same time reducing selling prices.
Bottom Line for FSLR Stock
Given that profits are likely to fall well below $1 per share for the next couple of years, a $37 current share price is difficult to justify. This is also about half the share price level from the middle of 2014. Again, the industry has evolved rapidly as supply has risen dramatically to more than offset the steadily rising demand.
Consumers with an interest in the solar industry are probably best served investing in solar panels for their homes. That being said, prices continue to come down while efficiency in creating energy only increases, so even investing in panels for the home could make more sense down the road.
Leasing panels is becoming an option — Elon Musk’s SolarCity (now part of Tesla Inc (NASDAQ:TSLA)) would be happy to pitch to you the possibilities.
As of this writing, Ryan Fuhrmann did not own any shares of companies mentioned.