Year 2013 turned out to be a solid one for First Solar (NYSE:FSLR), buoyed by growing global solar demand, strong execution on its utility scale solar projects, and significant improvements on the technology and manufacturing front. While we largely expect the firm to carry this momentum into 2014, there are three factors that we think will be key to the company’s stock performance this year.
1) Delivering Compelling Products From Technology Acquisitions
First Solar remains one of the few large panel manufacturers that use Cd-Te thin-film based technology. While the company’s panels are slightly cheaper to manufacture compared to silicon based panels, they trail silicon in terms of conversion efficiency. Last year, the company took some steps to improve its technology by acquiring General Electrics’s (NYSE:GE) thin-film panel manufacturing technology with the related patents, and also diversified into the high-efficiency polycrystalline solar space through its acquisition of TetraSun, a Silicon Valley based start-up. While these acquisitions look promising, the company has yet to begin commercial scale production using these technologies. We believe that the company’s future growth could hinge on the success of products that are manufactured using these technologies and this will be a key factor to watch this year.
2) Making Inroads Into The Two of The World’s Fastest Growing Markets: China and Japan
China and Japan are two of the fastest growing markets in the solar industry. However, First Solar’s presence in both markets remains negligible. The Chinese market provides scope for growth and large volumes, given the government’s plans to install around 35 GW of solar capacity by the year 2015. While First Solar had 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, the company’s management had indicated earlier in 2013 that the first phase of this project would finally begin towards the second half of 2013,  subject to regulatory approvals. We believe that the company’s progress in this project as well as the broader Chinese market will be a key factor to watch in 2014.
The Japanese market is skewed towards high-end, 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, First Solar entered the silicon panel space through its acquisition of TetraSun last year. 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. Separately, the company has also been targeting the Japanese utility scale market, and is investing around $100 million in Japan to develop solar power plants.((First Solar Press Release))
3) Improving The Book-to-bill Ratio
First Solar’s systems business, which accounts for over 80% of the company’s revenues, was the driving force behind the company’s performance during the last year. While the company has been executing on its existing project orders quite smoothly, we believe that it will need to pick up the pace of new bookings in order to grow the business going forward. For instance, First Solar began 2013 with a total order backlog of around 2.6 gigawatts (GW), and this number only improved marginally to about 2.7 GW at the end of Q3 2013 (the most recent data available). While the company has indicated that it has new booking opportunities to the tune of about 7.7 GW, it will be important to convert these leads into orders.Notes: