Weak Revenues Could Drag First Solar Stock Down to $70

First Solar stock (NASDAQ: FSLR) is up more than 50% since the beginning of 2020, but at the current price of $87 per share, we believe that First Solar stock has around 15% potential downside.

Why is that? Our belief stems from the fact that First Solar, a manufacturer of solar panels and provider of end-to-end solar system services, saw its stock rise more than 2.5x from the low seen in March 2020. Further, after posting mixed full-year 2020 numbers, it’s clear that First Solar did not benefit from the pandemic. Our dashboard What Factors Drove 106% Change In First Solar Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

First Solar stock’s rise since late 2018 came due to a 21% jump in revenues from $2.24 billion in FY 2018 to $2.71 billion in FY 2020. Despite a 1.3% increase in the outstanding share count, revenue-per-share (RPS) rose from $21.46 in FY ’18 to $25.59 in FY ’20.

In addition, First Solar’s P/S (price-to-sales) ratio rose from 2x in 2018 to 3.9x in 2020, before dropping to 3.4x currently, as the markets are pulling back from recent highs. However, given First Solar’s mixed full-year 2020 results, there is further downside risk for the company’s P/S multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns hampered solar module demand in the first half of 2020. However, the switch to solar as a cheaper source of energy has risen since, but this has not translated into revenue growth for First Solar. First Solar’s full-year 2020 revenues came in at $2.7 billion, down from $3.1 billion in FY 2019. First Solar’s new efficient Series 6 range is cheaper to manufacture, and this helped improve gross margins to 25.1% from 17.9% in FY 2019. Further, FY 2019 saw a $363 million litigation loss, to settle a long-running shareholder lawsuit. With a meager $6 million litigation loss in FY ’20 and other operating expenses also somewhat in check, First Solar’s operating margins surged to 11.7% from -5.3% in 2019.

With the economy opening up and people’s interest in solar energy rising, we expect steady demand growth for solar products. However, in FY ’20, First Solar clocked in 6.1 Gigawatts (GW) produced, up from 5.7 GW in 2019. Yet, the solar industry is characterized by dropping ASPs and rising volumes, and it’s most likely that rising GW produced may not translate into revenue growth. In that case, we believe this could lead to the stock seeing its P/S multiple decline from the current level of 3.4x to around 2.7x, which combined with a drop in revenue per share, could result in the stock price shrinking to as low as $70, a downside of 20% from the current price around $87.

While First Solar stock may not seem attractive, 2020 has created many more pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs Roper Industries. 

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