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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:
International Photovoltaic modules
- Gross Margins: The manufacturing cost of solar cells for First Solar declined from $1.47 per watt in 2005 to $0.75 per watt in 2010 due to significant improvements in technology. These figures are the lowest in the solar industry. As a percentage of the sales price, the company's manufacturing costs (adjusted for depreciation) fell from 59.2% in 2009 to 47% in 2011. We expect margins to decline to 20% by the end of the Trefis forecast period. If margins stabilize at around 30%, there is a 20% upside to our price estimate. If margins fall to 10% however, there could be a 20% downside.
- Price per Watt of PV Modules Sold: The average price per watt decreased from $2.25 in 2007 to $1.55 in 2010. Prices fell sharply to $1.04 in 2011 because of the shake up in the solar market. We expect that prices will continue to fall to around $0.60/watt by the end of the Trefis forecast period. However, if prices fall at a slower rate than estimated and reach $0.70 per watt by the end of the period, the Trefis price estimate could see a 10% upside.
First Solar is engaged in the manufacture and sale of solar modules with an advanced 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 International PV Modules division is the primary source of value for the following reasons
Growth in markets outside Germany
In 2009, 2010 and 2011 Germany contributed around 712 MW, 593 and 457 MW worth of PV module sales compared to 317 MW. 480 and 636 MW by the Rest of The World. As countries globally adopt solar energy as an alternative means of generating electricity and First Solar diversifies away from the German market, PV module sales in other countries are expected to rise.
Legislature 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. The U.S. government's Emergency Economic Stabilization Act of 2008 provided tax credits to investments made in alternative energy projects. Similarly the American Recovery and Reinvestment Act of 2009 provides tax incentives worth 30% of the total cost of installation, but the tax incentives in the U.S. expired at the end of 2011. However since 2012, most solar incentive programs announced were from emerging markets such as China and other places like Japan. Government subsidies and tax credits have enabled renewable energy companies like First Solar to thrive.
Australia’s PV market has been largely driven by demand in the residential sector with approximately 80% of the installed capacity being used for residential use. As a significant portion of the country’s electricity is generated through cheap coal, the solar market growth has been quite steady in the past. The government has revised its Solar Flagship program aiming to generate 20% of the nation's power supply from renewable sources. Australia had an installed capacity of around 1.03 GW in August 2011.
While governments have been cutting back subsidies of late, we expect subsidies in many countries to remain in place in order to encourage further growth in the industry.
Impact of the economic crisis
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.
Growth in Emerging Markets
Europe and developed nations are not the only ones taking the lead in the solar industry. According to EPIA, solar installations in emerging markets will become a major source of sales by 2016 as solar power becomes competitive with diesel power generation.
In China, with the help of Solar Rooftops and the Golden Sun programs in 2009, the PV market in China experienced strong growth achieving 228 MW in 2009 and then installed around 3 GW of panels in 2011. China is expected to become the largest market for solar installations by 2014 and install between 3-5 GW.
Trefis Forecast Rationale for Energy Capacity in Watts of PV Modules Sold
This refers to the total PV modules sold in terms of the total number of watts sold outside of Germany and the United States.
(1 Billion watts = 1 Gigawatt (GW) = 1,000 Megawatts (MW))
First Solar's total international Megawatts sold increased from 16.7 MW in 2007 to nearly 650 MW in 2011 as demand for PV modules increased in other some European markets as well as emerging markets. The number decreased significantly in 2012, to around 315 MW as the firm faced intense competition from manufacturers of crystalline silicon panels and other types of solar modules.
We expect First Solar's international PV sales to increase to around 760 MW by the end of the Trefis forecast period as demand from markets such as India and Africa drive demand.
Trefis considered the following factors for its forecast:
- Manufacturing capacity expansion
- First Solar has focused heavily on expanding its manufacturing capacity across the globe. The first factory was built in Ohio but due to heavy growth in Germany (which accounted for the bulk of the firm’s customers) and elsewhere
- Government incentives to drive demand increase
- In various parts of the world, governments have been giving subsidies and incentives to citizens who adopt solar energy usage. This has had the impact of increasing demand significantly across the globe.
- In India the government has set aside land in areas where solar radiation is easily available to foster solar energy growth. In December 2010, First Solar signed a contract to supply 15 MW of panels to India’s ACME Tele Power for a solar power plant to be constructed in the Indian State of Gujarat.
- Governments in China, Saudi Arabia and the U.K. are ramping up their focus on solar capacity as well, which should drive sales.
- Declining prices of solar electricity
- Declining module prices are reducing the cost of generating solar electricity and in markets such as Hawaii, solar power has already reached grid parity making it competitive with traditional grid power in the state. As grid parity is reached in other markets we expect demand for solar modules to increase significantly.
- Markets such as the Middle-East where solar electricity can be generated in an extremely cost efficient manner because of high solar irradiation are looking to run pilot projects to test the feasibility of solar generation.
- Limited fossil fuel supply and environmental concerns to drive growth
- Fossil fuels are limited in supply with easily extractable reserves being depleted quickly due to worldwide economic growth. This is likely to increase the need for renewable energy sources. In addition current energy production methods release pollutants like smog and carbon dioxide gas, while solar energy produces few, if any, pollutants or emissions. A greater focus on clean energy and reducing carbon footprints should drive demand for solar power.
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- Closure of production capacity in Germany
- First Solar has announced that it will close its production in Germany and focus on its manufacturing capacity in Malaysia and the U.S. to lower production costs.
- The company is lowering its production capacity to adapt to the excess capacity in the industry.
- Poor market penetration
- First Solar suffers from a market penetration issue, with significant German exposure. The firm has much lower penetration in many emerging markets compared to players such as Suntech and SunPower.
- More efficient alternative technologies
- Thin film technology which includes Cadmium Tellurium (CdTe) is known to be less efficient than traditional silicon PV modules. These modules generally have efficiencies greater than 15% compared to around 11% for thin film producers. Suntech Power, for instance has produced solar panels with a conversion efficiency of 17% compared to the 11.5-12% that First Solar has been able to achieve. However, thin films tend to do well in the longer term due to lower degradation over time.
- Subsidy cuts to impact PV modules sold
- While some emerging markets are just ramping up solar subsidies, other markets such as Italy and Spain are cutting back on their subsidies which will weigh on total module sales.
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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