Why We Cut Our Price Estimate For First Solar To $50

Trefis has reduced the price estimate for First Solar (NASDAQ:FSLR) by nearly 20% to around $50, amid slowing contracting activity in the firm’s power plant business and also due to potential pricing headwinds in the solar module business. Below we take a look at some of the factors impacting the price revision.

See our complete analysis for First Solar

First Solar’s Increasing Exposure To The Oversupplied Panel Market 

While the solar panel market has seen a few years of relative supply-demand balance, supply looks set to outstrip demand in the near term, hurting panel pricing and margins. Chinese demand is poised to see a sharp decline in H2 2016, after strong installations in H1, as developers rushed to complete projects prior to a drop in the country’s FIT on June 30, 2016. On the other hand, capacity growth is also expected to be strong, with manufacturing capex in the photovoltaic sector projected to hit five-year highs of about $5.3 billion in 2016, marking an increase of 60% from the lows of 2012. ^[1] As First Solar has been increasing its exposure to module-only sales (17% of total sales in Q2 2016, up from just about 2% in 2015), the oversupply situation could have an adverse impact on the firm’s overall margins and profitability in the near term.

Slowdown In Power Plant Contracting Activity

Contracting activity in First Solar’s bread-and-butter utility-scale solar business is also slowing down. The firm’s revenue backlog declined from $6.9 billion at the end of 2015 to about $6 billion as of August 3, 2016. First Solar’s project visibility for 2017 remains low, with the company presently looking to complete about 1 gigawatt worth of projects in 2017 (vs. 2.3 GW for 2016). ^[2] There are a few factors weighing on the utility solar market: firstly, uncertainty around the extension of the U.S. investment tax credit (which has now been extended) caused a build-up of projects during 2015 and the first half of 2016, while reducing demand for H2 2016 and 2017. Additionally, pricing in the power plant business is being impacted by stronger competition from independent power producers and smaller players.

That said, we still remain bullish on First Solar, with our price estimate representing a 30% premium over the current market price, owing to the company’s growing technological advantages, falling costs and a reasonably strong base of potential long-term booking opportunities.

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1. PV manufacturing capex to top US$5.3 billion in 2016, PV Tech, March 2016 [↩]
2. First Solar Lowers EPS Outlook For 2016; 2017 Visibility Murky, Investors, August 2016 [↩]