First Solar: A Lucrative Macro
Advancements in solar energy over the past few years have resulted in it becoming a highly feasible source of energy for many commercial as well as residential applications. The progress in this sector has been truly remarkable, and many listed players such as SolarEdge (NASDAQ:SEDG) have already seen their stock price multiply in the past three years.
Given the strong macro environment, it could be hard for investors to find a promising growth stock that is not trading at sky-high valuations. However, one such company within this space that has gone through a transition phase and is trading at surprisingly low valuations is Arizona-based First Solar Inc. (NASDAQ:FSLR). The management of this company has heavily invested in the future of solar energy and it has expanded its capacity significantly, paving the way for potential top-line growth.
What does First Solar do?
Founded in 1999, First Solar, Inc. is engaged in the provision of photovoltaic (PV) solar energy solutions in the U.S. as well as abroad. Its main clients include integrators and operators of PV solar power systems to whom it provides various kinds of solutions ranging from PV solar modules (using a thin-film semiconductor technology) to project management, engineering, procurement, maintenance and all forms of services related to the systems.
In 2019, the company chose to exit the engineering, procurement and construction (EPC) business, which they found it to be capital intensive and which was not their primary focus. Since then, the company has begun to concentrate on scaling, developing and selling modules. The company is currently being led by CEO Mark Widmar and is headquartered in Tempe, Arizona.
Reducing cost and better storage for solar energy
Solar power was once considered one of the most expensive sources of energy with a cost of over $350 per megawatt, way back in 2009. However, an increasing need to produce energy through clean sources and minimize fossil fuel emissions resulted in companies like First Solar, SolarEdge and others building technologies that have brought down production costs significantly.
According to Lazard's 2018 research, the cost of producing solar power is as low as $50 to produce one megawatt-hour of solar power. In comparison, coal energy costs as much as $102 per megawatt-hour. The consumption of coal across the globe is expected to decline sharply in the coming decade, resulting in a significant increase in the potential market for solar energy. In fact, in many scenarios, alternative energy costs have decreased to the point that they are now at or below the marginal cost of conventional generation.
Another distinctive improvement is the advent of high-quality energy storage systems which can be combined with intermittent forms of electrical generation such as solar and wind energy. Not only can the products today absorb and generate better solar power, but they can function well during times of bad weather, cloudiness, storms, lengthy periods without sunlight, and so on. This is one of the major factors boosting the competitiveness of solar energy production.
First Solar's investments in technological improvement
The rising demand for solar panels has resulted in First Solar managing to fully utilize its current capacity within its new Series 6 module. Over the last several years, the company has been investing heavily in its next-generation Series 6 module and its technology. The company incurred negative cash flows due to large investment in the Series 6 module and other one-time costs, and this is the reason why it had a weak financial performance in 2019. It was a year of transition for First Solar, which saw rising demand for its new Series 6 panels.
The management has gradually been moving away from its old Series 4 technology and looks to focus only on the new Series 6 module from 2020, where it has a production capacity of 5.5 gigawatts. Overall, First Solar is nearing the end of a major capital deployment period for the purpose of capacity expansion, which I believe should lead to a big jump in revenues and profitability.
Key takeaways
First Solar has definitely shown some recovery after the recent market crash, but it trades well below the 52-week-high and at multiples that are among the lowest in the solar industry. The stock is currently trading at an Enterprise-value-to-sales multiple of 0.95 and a forward price-earnings ratio of 13.38, which are significantly below the industry averages. While it has been struggling to reach a positive net margin, another important factor in its favor is that it has very low capital gearing with a debt-equity ratio of only 0.12.
These valuations, coupled with the solid macro-economic outlook, mean that First Solar could have a bright future.
Disclosure: No positions.
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This article first appeared on GuruFocus.
