First Solar Stock Appears Undervalued In Comparison To Its Close Rival

FSLR: First Solar logo
First Solar

We think that First Solar Inc. (NASDAQ:FSLR) currently is a better pick compared to SunPower Corporation (NASDAQ:SPWR). First Solar stock trades at about 3.4x trailing revenues, close to the 3.3x for SunPower, while First Solar’s P/EBIT stands at just 16x, significantly lower than SunPower’s 210x. Does this gap in the companies’ valuations make sense? We don’t think so. While both the companies have benefited in the pandemic, with an overall increase in demand for solar products, SunPower saw a stronger Q2 ’21. However, both companies performed the same over the first half of FY ’21, with a 21% rise in revenues over 1H ’20. Additionally, First Solar saw EPS rise from $1.21 in 1H ’20 to $2.75 in 1H ’21, while SunPower’s EPS rose marginally from $0.11 to $0.16 over this period, with EPS from continuing operations, in fact, dropping from $0.46 to $0.16.

Further, there is more to the comparison, which makes First Solar a better bet than SunPower at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard First Solar vs SunPower: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. First Solar Is The Clear Winner On Revenue Growth

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First Solar trumps SunPower in revenue growth. Solar companies saw a slump in demand in FY 2018, and all companies saw revenue drop due to this. First Solar’s revenue dropped from $2.9 billion in FY ’16 to $2.2 billion in FY ’18, while SunPower’s revenue fell from $2.6 billion to $1.2 billion over this period. However, since then First Solar has turned things around, with revenue jumping to $3 billion over the last 12 months. Meanwhile, SunPower’s revenue on an LTM basis, still stands at the same level as in FY ’18.

Additionally First Solar is a larger company, with around 2.5x the revenue of that of SunPower, combined with stronger revenue growth over the last three years, making it a better bet.

2. First Solar The Winner Again On Margins

While both companies have seen a steady rise in margins over the last 3-4 years, SunPower has only recently turned profitable and is struggling to maintain itself at this level. EBIT margins came in positive at 5.5% for the first time this decade in FY’19, and currently stand at only 1.6% on an LTM basis. On the other hand, First Solar has seen stellar EBIT margin growth recently, with margins rising from -5.3% in FY 2019 to 11.7% in FY ’20, and further to 19% on an LTM basis.

The Net of It All

With First Solar’s revenue and margins standing higher than that of SunPower, the former has also seen stronger growth in revenues and operating margins compared to SunPower in recent years. Even looking at the post-Covid recovery, First Solar has fared far better than SunPower, with LTM revenues more than 10% higher than the Covid fiscal year (FY 2020), while SunPower’s LTM revenues stand only around 5% higher than those in FY 2020. While SunPower has a significantly higher P/EBIT ratio of 210x vs First Solar’s 16x, and a similar P/S ratio at 3.3x vs First Solar’s 3.4x, First Solar has the potential to close the P/EBIT valuation gap, supported by strong financials. As such, we believe that First Solar is currently a better buying opportunity compared to SunPower stock.

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