What’s Driving First Solar’s Value?

-4.17%
Downside
169
Market
162
Trefis
FSLR: First Solar logo
FSLR
First Solar

First Solar (NASDAQ: FSLR), based in Phoenix, Arizona, is the world’s largest manufacturer of thin-film photovoltaic solar panels.  The firm’s stock price crashed from a high of $300 in 2008 to around $12 in June 2012 due to the downturn in the global solar industry. However, since then, the stock has staged a comeback, rising to the present levels of around $32 following stronger quarterly results and encouraging performance of its photovoltaic (PV) solar power systems business. Here we present a brief overview of the company’s products and business segments and the factors that are influencing its valuation.

Products And Business Divisions

The firm had revenues of around $2.8 billion last year of which around $2.1 billion came from the solar modules business and the remaining from the PV solar systems business.

Relevant Articles
  1. Down 6% This Year, What’s Happening With First Solar Stock?
  2. Down 17% In The Last Six Months, Will First Solar Stock Recover Post Q4 Results?
  3. Up A Mere 15% In 2023, Is First Solar Stock Poised To Do Better In 2024?
  4. Down 30% From Highs Seen In May 2023, Where Is First Solar Stock Headed?
  5. Why Is The Hydrogen Theme Underperforming This Year?
  6. Why This Renewables Theme Is Underperforming In A Strong Market

Solar Modules Business: First Solar manufactures thin-film cadmium telluride solar panels, which use a smaller quantity of silicon compared to polycrystalline and monocrystalline panels (See Also: A Comparison Of Solar Technologies And What They Mean For Companies). Thin-film modules have a lower conversion efficiency (First Solar reported 12.7% average efficiency in Q3) than silicon based panels and occupy more space for every watt of power they generate. This makes them  less suitable for applications like rooftops where space is at a premium. However, utility developers value Cd-Te thin film technology despite its larger footprint since it provides a more stable output in high temperatures and variable lighting conditions compared to silicon based solar modules.

The firm has a vertically integrated manufacturing process, producing solar cells and integrating them into modules. Customers include project developers, system integrators and resellers. Panels are manufactured in the United States and Malaysia. The division’s gross margins have declined sharply from around 40% last year to around 10% this year due to a drastic decline in panel selling prices. Competitors include polycrystalline panel manufacturers such as Suntech Power (NYSE: STP), Yingli Green Energy (NYSE: YGE) and thin-film manufacturers such as Sharp and Solar Frontier of Japan.

PV Solar Power Systems Business: The firm provides end-to-end solutions for building large scale solar power plants. Services range from identifying the land for projects, getting the necessary approvals and providing engineering procurement and construction services (EPC). The firm uses its own modules and procures balance of systems equipment like wiring and inverters from third parties. The firm also offers operation and maintenance for plants that it builds. Recently, First Solar opened a centralized control center in Arizona for monitoring and controlling solar power plants under its maintenance.

In the systems space, First Solar competes with SunPower (NASDAQ: SPWR) and could also face competition from Chinese firms like Yingli Green Energy going forward. Although the firm began focusing on its systems business just a few years ago, it has built a solid track record, having delivered several 10 MW plus size projects. First Solar also has a reasonably strong balance sheet compared to its peers, which is an advantage in the current market environment as customers are increasingly concerned about the financial strength of their project developers. The firm currently has a project pipeline of around 3 GW. Most of the projects are located in the United States. [1] The business has gross margins of around 30%.

Factors Driving First Solar’s Valuation

Focus on Sustainable Markets: As of last year, the firm derived over 40% of its sales from subsidy-driven European markets like Germany. Subsidized markets can be very unpredictable given that the demand is primarily influenced by government incentives which are subject to change. However, over the past year, First Solar has been focusing on sustainable markets where solar resources are good and the cost of electricity is relatively high, making solar power fundamentally more viable without the need for government backing. The firm has been increasing its footprint in markets like India, the Middle East and Australia through a slew of new project contracts.

Falling Polysilicon prices Are Rendering Thin Film Less Competitive: The primary selling point for First Solar’s panels has been low price compared to silicon-based panels. Last year, the firm’s manufacturing costs were between $0.70 and $0.80 per watt compared to polycrystalline panels that cost around $1.1 to manufacture. However, the price advantage has practically vanished due to a sharp decline in the prices of polysilicon, a key raw material used in manufacturing polycrystalline panels. As of Q3 2012, First Solar’s panels cost about $0.67 /watt while Yingli, a polycrystalline panel manufacturer, produced panels at just over $0.70/watt. [2] This could pose a threat to First Solar’s standalone module sales given that polycrystalline panels are more efficient and offer better durability. Polysilicon prices have declined from a peak of around $475 per kilogram in 2008 to about rates of around $20 this year.

Growing Systems Business: Unlike the increasingly commoditized solar panels business, the systems business faces less competition from Chinese solar firms and provides a means for First Solar to capture additional downstream value. For the first three quarters of 2012, the systems business accounted for around $1.5 billion in revenues, growing nearly 200% over last year. The business’ gross margins are also more attractive and offer an avenue to develop the modules business as well. Given that the firm provides a packaged solution that includes modules and EPC services, it partly helps to offset the efficiency disadvantage that the firm faces in selling standalone modules.

Understand how a company’s products impact its stock price on Trefis

Notes:
  1. First Solar Q3 Earnings Presentation []
  2. Yingli Green Energy Q3 Earnings Presentation []