First Solar (NASDAQ:FSLR) is not a bad stock to buy, since its solar module business is growing meaningfully and its valuation is low. But with the company in a state of flux and failing to provide either great value or rapid growth, there are much better solar stocks to buy at this point. Further, FSLR stock could be meaningfully hurt both by likely reductions of U.S. tariffs on imports of solar energy products from China and scheduled cuts in the U.S. solar tax credit.
In conjunction with its fourth-quarter results, the company on Feb. 20 announced that it would “review options for its U.S. project development business.” Translated into normal English, that means First Solar will likely look to sell its business that develops large-scale, solar power projects in the U.S.
On this issue, I agree with the sentiments expressed by two analysts. Oppenheimer analyst Colin Rusch says that he’s “cautious” on First Solar stock “pending further business model clarity.”
Indeed, anyone investing in the shares now doesn’t know whether the company will be in the business of developing large-scale solar projects six months from now. Most medium-term and long-term investors like to know a great deal about the outlook of the companies whose shares they buy.
More importantly, dealing with this issue is likely to consume a great deal of the attention and time of the company’s management for the foreseeable future. In a highly competitive market like solar, companies can easily be badly hurt if their management teams don’t stay completely focused on the issues at hand.
But I also agree with Cowen analyst Jeffrey Osborne who thinks that the company is right to look to sell its large-scale development business.
He says that the unit “plagues (First Solar’s) results, both in terms of timing of revenue as well as profitability.”
While I think that developing large-scale solar projects could prove to be very profitable in the longer term, such projects haven’t been very lucrative for First Solar, and they’ve made its financial results rather unpredictable. And those difficulties won’t go away anytime soon.
Still, the uncertainty created by the company’s announcement, along with the distractions the move will create for the company’s management, makes it tough to buy the shares at this point.
Decent Results and Upcoming Challenges
Even though First Solar’s Q4 results didn’t look great on the surface, its module business, which would be the core of the company if it sells its large-scale development business, did pretty well last year.
The company shipped a record 5.4 gigawatts of modules and booked sales of 6.1 gigawatts in 2019. First Solar expects to ship 5.8 to 6.0 gigawatts of modules this year. The module business’ gross margin was 40% in Q3 and 24% in Q4. Those are impressive gross margins for a solar module business.
But First Solar, which gets the vast majority of its revenue in the U.S,., is facing some important headwinds in the country. Specifically, America’s tariffs on imported Chinese solar modules and tax credits for solar projects are both slated to drop. First Solar’s modules are exempt from the tariffs, so First Solar could easily lose share to Chinese module makers as the tariffs decline.
Meanwhile, the growth of the overall U.S. solar market could slow as the tax credits drop. Although I believe that state renewable energy mandates and the growing competitiveness of solar with fossil fuels will prevent solar’s growth in the U.S. from decelerating much, even a slight deceleration could materially, negatively impact First Solar’s results.
There Are Better Solar Stocks
FSLR stock is trading at 13 times analysts’ average 2020 earnings per share estimate. That’s cheap, but two Chinese solar stocks are much cheaper; JinkoSolar (NYSE:JKS) and Daqo New Energy(NYSE:DQ) have forward P/E ratios of just 5.3 and 7.2 respectively
First Solar’s top line is expected to drop 5.7% this year, while the revenue of two solar inverter makers, Enphase (NASDAQ:ENPH) and SolarEdge (NASDAQ:SEDG), is expected to jump 42% and 28%, respectively. Clearly, Enphase and SolarEdge are better choices for growth investors than First solar.
The Bottom Line on First Solar
First Solar is in a state of flux that makes its outlook difficult to determine, and its management team could be distracted by the likely sale of its large-scale-project business. Moreover, value investors and growth investors both have better choices in the solar sector than First Solar.
As of this writing, Larry Ramer owned shares of JinkoSolar and Daqo New Energy. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.