Why We Cut Our Price Estimate For First Solar

We have cut our price estimate for First Solar (NASDAQ:FSLR), the largest U.S. based solar manufacturer, from about $43 per share to about $35 per share, on account of a challenging global market for solar products, a less conducive regulatory environment in the United States and also due to a near-term handicap in the firm’s panel business, as it revamps its production facilities to manufacture its next generation Series 6 modules. Below we take a look at some of the key factors driving our revised price estimate for First Solar, which is still around 30% ahead of the market price.

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Market Headwinds Impact First Solar’s Panels And Systems Business

The solar panel market has been witnessing a phase of supply-demand imbalance over the last few quarters, and things could remain challenging in the near term. Solar demand from China – the world’s largest solar market in recent years – looks set for a sharp decline (by as much as 40% per GTM Research) in 2017, due to policy issues. Things have been challenging on the supply side as well, with over 20 GW of module manufacturing capacity  added globally during 2016, driving down prices. Solar power plant contracting activity has also been weak, amid competition from independent power producers and smaller players. The bankruptcy of SunEdison – the world’s largest renewable power developer – in early 2016 has also driven up the required rates of return that solar investors are seeking to compensate for higher risks on their projects, putting pressure on systems pricing and margins. These market headwinds are likely to impact First Solar’s systems and modules business in the near term.

Uncertain Regulatory Environment In The United States

Federal support for renewables in the United States could diminish under the new administration, and incentives such as the solar investment tax credit could potentially be dismantled, as the government’s proposed tax reform plans pressure the federal budget. While solar is increasingly competitive with conventional forms of energy, there is a possibility that an adverse regulatory environment could hurt growth. Moreover, the U.S. is no longer likely to play a leadership role in the battle against climate change, with the Trump administration rolling back several Obama-era environmental protections. There is a possibility that China could look to play a more prominent role, empowering its renewable energy companies in the process.

Near-Term Technology Handicap

First Solar said that it would be accelerating development of its Series 6 module, which it will now launch in 2018, while cancelling development of the Series 5 module that it was slated to roll out in 2017, as the panels wouldn’t have been very competitive in current market conditions. While the move will help the firm cut costs and improve its longer-term road map, it will mean that First Solar will have to compete using its older Series 4 modules (which have a low 120 watt capacity) for the next year or so. This could prove a disadvantage for the company, as silicon-based panel manufacturers, particularly from China, are offering high-capacity panels at lower per-watt prices.

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