Why We Increased Our Price Estimate For First Solar To $45

by Trefis Team
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We are increasing our price estimate for First Solar (NASDAQ:FSLR) from around $37 per share to about $45 per share, representing an upside of over 10% from the current market price. While the solar industry has witnessed a downturn over the last year, amid projected declines in demand from major markets such as China and an oversupply of panels, we believe that First Solar could outperform in the long run, considering its strong technology road map and its cash-rich balance sheet. Below we provide some of the key reasons for our stance.

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First Solar Is Making Progress In International Markets

First Solar’s revenues have been geographically concentrated in the United States, with the market alone accounting for ~83% of sales in 2016. However, the company looks well-positioned to capitalize on the next wave of solar growth from emerging markets such as India. In India, for instance, First Solar is gaining traction driven by its proprietary technology that delivers 5% to 7% more energy per watt considering the country’s sunny climate, compared to crystalline silicon solar panels. The firm is also making progress in Japan, where it signed a $64 million deal with Mizuho Bank to finance the development of its utility-scale PV project pipeline. Per the company’s Q1’17 earnings presentation, over half its mid-to-late stage booking opportunities came from international markets. This could help the firm diversify its revenue stream in the long run.

Series 6 Modules Could Put It At An Advantage Next Year 

First Solar is accelerating development of its Series 6 module, which will now launch in Q2 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 decision puts First Solar at a disadvantage until mid-2018, as its current Series 4 modules lag silicon-based modules in terms of cost and rated capacity, the decision should prove beneficial over the long term. The Series 6 panels are projected to cost roughly 40% less compared to Series 4 modules. Conversion efficiencies for Series 6 are also expected to stand at over 18% at launch, well ahead of the 16.5% efficiencies offered by current modules. First Solar expects Series 6 to be rated at upwards of 420 W per panel, compared to 365 W for the now-cancelled Series 5. Moreover, the modules are very efficient from a capex standpoint as well, implying that the firm could scale up more efficiently.

Strong Balance Sheet Helps

Boom and bust cycles are part and parcel of the solar industry, and the companies that have underperformed or failed in the past have typically been straddled with significant debt or lacked product differentiation. However, First Solar is well positioned to ride downturns in the solar market, given its $2 billion+ in net cash as well as its differentiated Cd-Te technology, which has a higher efficiency potential compared to silicon panels. This could position the company to capitalize on long-term solar demand. For instance, GTM Research estimates that the size of the solar market would grow from around $87 billion in 2016 to about $250 billion in 2035, with cumulative installations over that period coming in at around 3,000 GW. For perspective, First Solar produced just 3.1 GW of panels in 2016, implying that there remains significant potential for growth.

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