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Investment Overview for First Solar (NASDAQ:FSLR)
Below are key drivers of First Solar's value that present opportunities for upside or downside to the current Trefis price estimate for First Solar:
PV Solar Systems
- Systems Revenues: First Solar's PV systems revenues have expanded from around $100 million in 2009 to about $2.2 billion in 2015. The growth in this business has been aided by government incentives as well as the increasing economic viability of solar power systems. We estimate that revenues from this business will grow to around $3.3 billion by the end of the Trefis forecast period on the back of increasing project activity overseas. If revenues from this business exceed our expectations and actually grow to around $4.5 billion by the end of the Trefis forecast period, it could result in a 15% increase to the Trefis price estimate. On the contrary, if revenues from the systems business only rise to around $2.5 billion, it could result in a 10% downside to the Trefis price estimate.
United States PV Modules
- Gross Margins: The manufacturing cost of solar modules for First Solar declined from $1.47 per watt in 2005 to under $0.45 per watt in 2014 due to significant improvements in technology. These figures are currently among the lowest in the solar industry. We expect the company's manufacturing costs to fall faster than average selling prices, translating to better gross margins. We forecast that the company's gross margins will rise from current levels of around 25% to around 27% by the end of our review period. If margins actually rise to around 30%, there could be an upside of around 5% to our price estimate. On the other hand, if they fall to 10%, there could be a 7% downside to our price estimate.
First Solar is engaged in the manufacture and sale of solar modules based on Cadmium-telluride thin-film semiconductor technology. In addition the firm also designs, constructs and sells photovoltaic (PV) solar power systems. The company operates in two main business segments: the components segment and the systems segment. The components segment is responsible for the design, manufacture and sale of solar modules to solar project developers and system integrators. The systems segment provides PV solar power system for commercial systems, which includes project development, engineering, procurement and construction (EPC), operating and maintenance (O&M) services.
The PV Solar Systems division is the primary source of value for the company for the following reasons:
Higher Gross Margins
First Solar's systems business has higher gross margins (over 40%) when compared to its solar panels business (about 15%) since the systems business involves supplying solar panels as well as related engineering, procurement and construction services. The business is relatively less commoditized, and faces less competition from Chinese solar companies, who have been responsible for driving down prices in the panel market.
Growth in Markets Outside North America
First Solar's systems business is presently largely centred around the U.S. market. However, the company has a lot of opportunity overseas, particularly in markets like Latin America where electricity rates are high and consumption growth is much stronger than in the United States. Other growth markets include the Middle East, India, Asia Pacific and China. The company has indicated that over half of its new systems booking opportunities (in terms of system capacity) come from overseas.
Possibility of oversupply in the near-term
While the solar industry has seen a about two years of relative supply-demand balance, there is a possibility that supply could outstrip demand in the near-term, considering the significant manufacturing capacity expansion that the industry is witnessing.
Global manufacturers announced capacity expansions (cell, module and thin film) to the tune of 49 GW over Q4’15 and Q1’16, according to research firm PV Tech. This marks a significant jump over capacity expansion announcements of just about 16 GW in the year ago period. Seperately, there are some concerns that demand could plummet in China during H2 2016, given the expiry of some feed-in-tariffs in late June. This could potentially hurt pricing and margins for solar companies in the near-term.
Legislature and incentives to aid renewable energy projects
Governments all across the world have taken measures to encourage the use of solar technology as a way to help them remove their dependence on fossil fuels. For instance, in the United States, at the Federal level, the government offers incentives including an investment tax credit (ITC) of around 30% on the initial cost of a solar system. The credit, which was slated to decline in from 2017, was extended by U.S. Congress in December 2015. Under the new legislation, the 30% credit will be extended for another three years, dropping incrementally to 22% by 2021, while remaining at 10% permanently beginning in 2022. There are
also legislations at the state level, such as the renewable portfolio standards, that require utility companies to generate a certain portion of their electricity from renewable sources. Countries such as China and Japan also offer incentives in the form of feed-in-tariffs that allow photovoltaic plants to sell electricity for above market rates.
First Solar's Technology Has A Lot Of Potential
First Solar's panel efficiency gains have been outpacing the broader industry over the past few years. The Cd-Te thin film technology that the company deploys has a higher theoretical upper limit for efficiency compared to silicon-based panels, and we see this as providing a competitive advantage over the long term. Per the company’s efficiency roadmap, its Cd-Te panel efficiency which currently stands at a little over 14% is expected to equal that of polycrystalline modules by the end of 2015, with efficiencies touted to improve to above 19% by 2017. Higher efficiencies benefit the company in two ways. Firstly, it would make panels more competitive in the rooftop market, where higher energy density panels are valued due to space constraints. Secondly, it could help to prune down manufacturing costs, since higher efficiency panels are likely to require a smaller amount of consumables and raw materials to produce each watt of capacity.
Consolidation within the solar industry
The global economic crisis had a profound impact on the solar industry. The rise in energy prices prior to the economic downturn led many solar manufacturers to increase capacity. This helped certain manufacturers as they benefited from economies of scale which in turn helped reduce prices. However, due to the credit contraction that occurred during the financial crisis, the installation of solar power systems declined significantly. The economic crisis impacted demand for everything ranging from polysilicon to rooftop panels. As a result many smaller players with weak balance sheets have been struggling which has led to consolidation in the industry.
Innovation in solar technology
The PV industry has seen strong growth in the past few years and the total number of solar cells produced globally has increased over seven times in the past five years. Installation of these solar technologies has also increased sharply during this period. Solar companies are continuously working to improve current technology, reduce costs and make systems more efficient. PV module efficiency and costs are drivers for most of the PV power plants; therefore maintaining and improving these aspects of the company are important.
Emerging Solar Markets Will Account For Bulk Of Future Demand
China became the worlds largest solar market in 2013, overtaking Germany as the worlds largest solar market. Other emerging markets such as Latin America and the Middle East are also becoming important markets for solar power, given a combination of high electricity prices and strong consumption growth.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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