Up 33% This Year, Would A Change In Washington Derail First Solar Stock’s Rally?

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Trefis
FSLR: First Solar logo
FSLR
First Solar

First Solar stock (NASDAQ:FSLR) has had a solid year, rising by about 33% year-to-date. In comparison, Enphase Energy stock (NASDAQ:ENPH), another solar component player, has seen its stock decline by 18% over the same period. First Solar stock has been benefiting from several factors.

First Solar’s financial performance has been solid in recent quarters.  First Solar’s revenues rose by 45% year-over-year in Q1 2024, while net profit margins also surged to over 28%, up from roughly 8% in the year-ago period. While profits are driven in part by regulatory tailwinds and easing supply chain constraints, First Solar’s more efficient thin-film solar panels and its focus on large-scale solar projects are also likely to help the company as volumes ramp up. Demand for solar has remained strong with the company recording about 2.7 gigawatts of bookings from January through early May, taking its total bookings backlog to 78.3 GW giving the company considerable demand visibility.

The current regulatory environment is also very favorable for U.S.-based solar manufacturers such as First Solar.  The Biden Administration recently increased tariffs on solar cells imported from China from 25% to 50%. This should prevent dumping by the Chinese, given that there is a massive capacity glut in China, with the country’s solar panel production capacity estimated to stand at more than 2x global solar demand in 2023. Separately, First Solar is also benefiting from the Section 45X tax credit under the U.S. Inflation Reduction Act, given that it has been doing an increasing mix of its manufacturing in the U.S. For perspective, toward the end of December 2023, the company announced that it had signed agreements for the sale of up to $700 million in 2023 tax credits it earned under the act. The company is likely to realize $1.0 billion to $1.05 billion of Section 45X tax credits this year as well, adding directly to its operating profits.

The rising demand for artificial intelligence (AI) applications is expected to drive increased adoption of solar power, as big technology companies build massive, energy-intensive data centers to run their computationally-intensive AI systems. Solar power is an ideal energy source to power a part of this growing electricity demand, given its relatively low costs and low carbon intensity. Although renewable energy sources such as solar have limitations due to their intermittent nature, tech giants often use renewable power purchase agreements to offset their fossil fuel consumption. First Solar is well-positioned to benefit from this trend, given its focus on utility-scale panels and strong presence in the U.S. which is a pioneer in the AI space.
FSLR stock has seen extremely strong gains of 130% from levels of $100 in early January 2021 to around $230 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period.
However, the increase in FSLR stock has been far from consistent. Returns for the stock were -12% in 2021, 72% in 2022, and 15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that FSLR underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FSLR face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
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Overall, we think that there are multiple long-term positives for the solar sector at large and First Solar in particular. Things are getting better on the macro front. Inflation has cooled off considerably. The Federal Reserve is considering reducing interest rates in 2024. This should bode well for renewable energy stocks, by making financing of large-scale projects more affordable. First Solar is emerging as one of the big beneficiaries of the U.S. efforts to encourage domestic renewables production given its vertically integrated manufacturing. That said, there are risks as well. A meaningful part of First Solar’s strong financial performance can be attributed to the Inflation Reduction Act and these tailwinds are likely to eventually ease. Moreover, the upcoming U.S. Presidential and Congressional elections due later in 2024 could prove a risk for the company.  Inflation Reduction Act-related tax credits could be modified if Republicans, who typically favor a market-based approach over subsidies for renewables – take control of the White House and Congress. Donald Trump holds a 2.3-point lead versus Joe Biden, according to polling averages from FiveThirtyEight. That said we remain neutral on First Solar stock, with a $235 price estimate, which is roughly in line with the current market price. See our analysis of First Solar Valuation: Expensive or Cheap for more details.

 Returns Jul 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 FSLR Return 1% 33% 612%
 S&P 500 Return 3% 18% 152%
 Trefis Reinforced Value Portfolio 1% 8% 665%

[1] Returns as of 7/11/2024
[2] Cumulative total returns since the end of 2016

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