First Solar Should Double Down On International Markets As It Expands Capacity

First Solar (NASDAQ:FSLR), the largest U.S. solar equipment manufacturer, has aggressive plans to expand its manufacturing capacity. The company is expected to increase its total production capacity from levels of roughly 2 GW in 2017 to about 7.6 GW by 2020, driven by its expansions in Malaysia, Vietnam as well as its plans to add a new module manufacturing facility in the U.S., next to its operations in Ohio. The company appears to have good reason to expand in the near term. First Solar currently enjoys a significant advantage over its silicon-based panel rivals in the United States, as its thin-film panels are exempt from the 30% tariff imposed on imported silicon solar panel. While there is a tariff exemption for 2.5 GW worth of silicon solar cell imports, it’s fair to assume that First Solar will increase its share of the U.S. market, which is expected to see total installations of 10 GW this year. The company is also seeing strong interest in its new larger format Series 6 panels, which address its long-standing capacity handicap (the panels will have a rated power of over 3x its Series 4 panels). Year to date, First Solar has booked a total of 3.3 GW of capacity, with its shipment backlog standing at about 10.6 GW (including both systems and third-party module), per its most recent earnings release. The company could utilize the new capacity to fulfill this growing demand and backlog.

We have created an interactive dashboard analysis showing our expectations for First Solar over 2018. You can modify the key drivers to arrive at your own forecasts and valuation for the company.

The U.S. Market Will Eventually Cool Off And Tariffs Will Expire In 2022

However, there could be challenges over the longer term. First Solar has traditionally been reliant on the U.S. solar market, and the U.S. utility-scale solar market in particular, to drive its sales. During 2017, the company derived roughly $2.3 billion in sales from the U.S, translating into about 77% of its total revenues. However, the utility-scale solar market, for which First Solar’s panels are best suited, is expected to cool off in the longer run. Per GTM Research, this market stood at roughly 6.2 GW in 2017 and is expected to remain flat in 2018. While installations are expected to grow to about 7.3 GW in 2019, it could remain flat through 2021. If we go by First Solar’s production roadmap, this essentially means that its production capacity could outstrip its bread-and-butter market. This means that First Solar will have to double down on its expansion in international markets such as the Middle East and India, where solar installations are growing fast. While the company won’t have any regulatory advantages in these markets, unlike in the U.S., it could bank on its declining manufacturing costs and improve scale to drive sales.