First Solar (NASDAQ:FSLR), one of the world’s largest solar companies, has had a relatively eventful year so far, closing deals to acquire new technology, raising additional equity capital and expanding its project portfolio through new acquisitions. Although the stock is up by nearly 50% this year, it has largely underperformed in the broader solar industry. For instance, the Guggenheim Solar ETF, a popular exchange traded fund comprising of solar stocks, is up by around 100% year-to-date while SunPower (NASDAQ:SPWR), one of First Solar’s biggest competitors, is up by over 400%. First Solar currently trades at around $43 which is only slightly above its book value. In this note, we take a look at three potential catalysts for the company’s stock.
1) Delivering Competitive Products From The Recent Technology Acquisitions
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First Solar’s panels, which are manufactured using a cadmium telluride (Cd-Te) based thin-film technology, have been lagging behind polycrystalline panels in terms of conversion efficiency as well as cost. Efficiency is a relatively important metric in the solar industry, as panels of a higher efficiency require less space and less balance-of-systems equipment such as mounting equipment. Polycrystalline panels typically have efficiencies of around 14% to 15%, while First Solar’s panels have an average efficiency of around 13%. Additionally, most Chinese polycrystalline panels sell for between $0.60 and $0.65 per watt, while First Solar’s manufacturing costs alone amount to around $0.67 per watt, implying that its panels should cost at least 10% more when compared to polycrystalline panels. (Related: Are First Solar’s Thin-Film Panels Falling Behind?)
The company has been taking some steps to improve its technology by acquiring General Electrics’s (NYSE:GE) thin-film panel manufacturing technology with the related patents and also diversifying into the high-efficiency polycrystalline solar space through its acquisition of TetraSun, a Silicon Valley based start-up. While the acquisitions look promising, the company has yet to begin commercial scale production using these technologies. We believe that a lot of the company’s future growth could hinge on the success of products that are manufactured using these technologies.
2) Improving The Project Order Book
First Solar’s systems business has been the driving force behind its performance over the last several quarters. While the company has been steadily building its portfolio of projects under development through a series of acquisitions from independent project developers, it has not seen a similar trend in terms of bookings. While the company’s outlook for the systems business is positive and expected to drive overall revenues to as high as $4.8 billion in 2015, most of this guidance comes from uncommitted projects.  The company has also been executing its contracts at a faster pace than it has been adding new bookings. As of August 2013, the company’s total backlog of bookings fell to 2.2 gigawatts (GW) from around 2.6 GW in the beginning of the year. While this is quite concerning, the company says that it is has been pursuing several new booking opportunities totaling around 8 GW. The company’s progress in translating these opportunities into new orders will remain a critical factor to watch.
3) Making Headway In China And Japan
China is expected to become the world’s largest solar market in terms of volumes this year, while Japan could become the second largest market in terms of volumes and the largest market by value. However, First Solar’s presence in both markets remains relatively small at the moment and we believe that succeeding in these high growth markets could prove to be another key catalyst for the stock.
Although First Solar signed a memorandum of understanding with the Chinese government in 2009 to build a 2 GW solar plant in Inner Mongolia, the construction activity never really took off.  However, during the company’s Q1 2013 conference call, the management indicated that the first phase of this project (with a capacity of around 30 MW) was finally slated to begin construction during the third quarter of this year, subject to regulatory approvals. The second phase (with a capacity of between 300 MW to 500 MW) could begin by the second half of 2014.  If these projects materialize as planned, they will give the company a much needed boost in the Chinese market.
The Japanese market is skewed towards high efficiency solar panels given the space constraints in the country and this has put First Solar at a marked disadvantage since its Cd-Te panels typically have a lower efficiency when compared to silicon panels. However, the company recently entered the silicon panel space through its acquisition of TetraSun. The company is expected to begin production of solar cells using this technology from the second half of 2014, and we believe that this product could help the company gain some ground in the Japanese market. Notes: