What’s The Downside For First Solar Stock?

Up more than 3x since March, we believe First Solar stock (NASDAQ: FSLR) could see significant downside. First Solar stock is up 72% so far this year. It traded at $58 in February 2020 – just before the outbreak of coronavirus – and is currently 65% above that level, as well. Further, with solar module and system demand still not back up to pre-Covid levels, demand for the company’s products will remain low in the near to medium term, and the stock has the potential to drop around 20% to levels below $80. Our conclusion is based on our comparative analysis of First Solar stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 65% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how FSLR stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FSLR and S&P 500 Performance Over 2007-08 Financial Crisis

We see FSLR stock declined from levels of around $127 in October 2007 (pre-crisis peak) to levels of around $106 in March 2009 (as the markets bottomed out), implying FSLR stock lost 16% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $135 in early 2010, rising by 27% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

FSLR Fundamentals Over Recent Years

FSLR revenues decreased from $4.1 billion in 2015 to $3.1 billion in 2019, due to dropping ASPs. Along with lower revenue, earnings also decreased from $5.88 in 2015 to -$1.09 in 2019, as dropping selling prices hurt margins.

Does FSLR Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

FSLR’s total debt rose from $160 million in 2016 to $454 million in 2019, but its total cash jumped from around $2 billion to $2.2 billion over the same period. Further, the company generated around $0.2 billion cash from operations in fiscal 2019. A strong cash cushion combined with a positive operating cash flow, provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., and the impact on industrial and manufacturing activities, we expect demand for solar modules and systems to stay weak in the near term. We believe that First Solar stock has significant potential downside in the near term, and even as the lockdowns are gradually lifted, the solar sector is an industry where selling prices historically trend downward, and if the company is unable to significantly drive up sales volumes, revenues will stay weak in the near to medium term. This could see FSLR stock potentially drop 20% from its current level.

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