Is Now the Time to Buy First Solar (FSLR)?

2024 is shaping up to be the hottest year since global surface temperature readings began in the mid-1800s, beating out 2023 for the title.

Climate science is a touchy subject. Yet, government action and increasing power consumption for AI and cloud data centers demand an all-in approach.

Naturally, solar stands to benefit as mass production continues to lower costs.

This macro theme has translated to higher stock prices for companies like  First Solar (FSLR).

The top solar stock search by financial pros over the last 30 days is up 31% YTD and 211% over the last two years.

However, timing is everything with these stocks, as shares of First Solar are only up 19% in the past year.

So, is this the time to buy the stock?

First Solar’s Business

Founded in 1999, this American solar technology company has carved a unique niche as the only US-headquartered firm among the world’s top ten solar manufacturers not producing in China, a very big deal politically. 

Its operations span the globe, with a manufacturing footprint that includes the US, India, Malaysia, and Vietnam. 

The company acts as a comprehensive provider of photovoltaic solar solutions, including advanced thin-film photovoltaic modules, helping it serve customers ranging from utility-scale project developers to commercial and industrial entities. 

First Solar segments its business into the following areas:

• Modules (over 90% of total revenues) – This segment includes designing, manufacturing, and selling solar modules, which use advanced thin-film semiconductor technology to convert sunlight into electricity.
• Systems (remainder of revenues) – Encompasses the development, construction, and sale of photovoltaic solar power systems that primarily utilize the modules manufactured by the company.

Recently, the company reported a robust start to 2024, with first-quarter net sales of $794 million and a net income per diluted share of $2.20.

While Chinese competitors struggle with oversupply, First Solar has benefited from tariffs and tax incentives built into the Inflation Reduction Act.

Currently, the company holds a 78.3 GW booking backlog through 2030.

Source: First Solar Investor Relations Q1 2024

Financials

Source: Stock Analysis

Since the pandemic, gross profits have exploded as margins doubled from top to bottom.

Cash from operations continues to climb, only held back by increased inventory for customers.

First Solar holds nearly 3x as much cash as debt, with excess being put into reserves for production expansion.

Valuation

Source: Seeking Alpha

As the matrix above shows, not all solar companies generate positive cash flow, let alone profits.

First Solar and Enphase (ENPH) are the only two companies domiciled in the U.S., giving them higher premiums than their peers.

However, they both are the only ones to generate a profit and cash save for Canadian Solar (CSIQ), a Chinese company that trades at a huge discount.

Growth

Source: Seeking Alpha

Revenue growth and its outlook highlight the effects of the Inflation Reduction Act and import barriers.

Non-U.S. companies are seeing sales drop while First solar continues to shine. Enphase makes solar equipment, not panels, putting it in a slightly different position.

Profitability

Source: Seeking Alpha

Higher realized prices, demand, and improved operations have helped First Solar achieve unmatched profitability, allowing it to generate plenty of cash.

Returns on assets, equity, and total capital aren’t as high as we’d like. However, those will improve as production expands.

Our Opinion 8/10

First Solar is our top solar pick. 

As the only U.S.-based solar panel manufacturer, it plays a key role in the country’s growth.

However, the incentives from the Inflation Reduction Act will eventually dissipate, and we don’t expect them to be renewed. 

Given this and the high volatility of the stock, while we like the company, we would wait for significant pullbacks to purchase shares, giving ourselves a cushion of safety.

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