It’s been a downright terrible week for First Solar, Inc. (NASDAQ:FSLR), with the shares off more than 20%. And various other companies in the sector have also come under pressure like ReneSola Ltd. (ADR)(NYSE:SOL), Hanwha Q Cells Co Ltd -ADR (NASDAQ:HQCL) and SunPower Corporation (NASDAQ:SPWR).
The reason for all this? Well, of course, it’s politics. In particular, the situation between the U.S. and China is getting more tense.
For FSLR stock, Wall Street analysts have wasted little time in going negative. Just look at the following moves this week:
- Bank of America Corp (NYSE:BAC) lowered its rating on FSLR stock from “buy” to “neutral” and reduced the price target from $83 to $63.
- JMP took down its rating from “outperform” to “underperform” and downgraded the price target from $87 to $46.
The irony is that FSLR stock has had a strong run before this week — from $47 in October to a high of $81 — because of the impact of President Trump’s trade actions. Keep in mind that the company is exempt from U.S. tariffs on solar cells.
But China has shot back — and hard. The National Development Reform Commission (NDRC) has made some important policy changes, such as reducing payments for a solar feed-in-tariff (FIT) for utility scale and distributed projects. There were also limits on new permits. The bottom line: China is reducing demand and this is likely to result in lower pricing, which will pinch margins for solar operators.
But there is something else. That is, to find more revenues opportunities, Chinese companies will probably get more aggressive in capturing market share in the US.
So yes, in light of the situation, it’s reasonable for BAC and JMP to go negative on FSLR stock. What’s more, it appears that the problems could last a couple years.
Politics is always a big factor with the solar industry. In other words, companies have been able to create strategies to adapt to the changes.
In the case of FSLR, the company does have long-term contracts that should help soften the impact of the recent trade actions. There is also continued traction with bookings, at 3.3GW for 2018. And yes, don’t forget about the Investment Tax Credit, which is a key part of the business. Note that BAC thinks this could be extended through 2023.
In light of all this, there should be some level of stability in the revenue base.
It’s also important to keep in mind that FSLR is a disciplined company, with $2.9 billion in the bank. The debt load is also a manageable at $438 million. Essentially, FSLR has the wherewithal to deal with a slowdown in the market and could even take advantage of the weakness from some of its rivals.
Bottom Line On FSLR Stock
With the recent drop, FSLR stock is certainly much more attractive. Consider that the forward price-to-earnings ratio is about 17X.
And yes, the long-term picture for solar is compelling. This form of energy is becoming more competitive, even without subsidies. There is also much more interest in cleaner forms of energy.
But then again, this does not imply you should rush to buy FSLR stock either. When the solar sector goes out of favor, the stocks can languish for some time. Besides, there could easily be more negative news on the trade front. Let’s face it, politics can be extremely tough to gauge.
So for now, FSLR stock is one to keep an eye on — and may be worth a purchase if there is further weakness.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.