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Quick Take

  • First Solar will venture into silicon based solar cell manufacturing through its acquisition of TetraSun, a start-up that has developed a proprietary silicon panel manufacturing technology.
  • We think its a great move since it will let the firm diversify its product offerings, which are currently dominated by low efficiency Cd-Te thin film panels.
  • The deal should allow the company to ramp up its presence in the rooftop market and gain ground in markets like Japan.
  • Separately, the firm has issued its guidance for 2013 projecting EPS of up to $4.5 and revenues of up to $4 billion which were significantly higher than analysts expectations. The stock rallied by over 45% initially on the news.

First Solar (NASDAQ:FSLR) will be entering the silicon solar panel business through its acquisition of TetraSun, a Silicon Valley based start-up. The deal, which was announced during the firm’s analyst day conference on Tuesday, marks a strategic shift of sorts for First Solar and could help diversify its product portfolio which currently dominated by Cd-Te panels which have been rapidly losing their price advantage. [1] The deal also provides the company an opportunity to broaden its reach into the rooftop solar market. The company did not disclose the price or the terms of the transaction, which is expected to close sometime in Q2 this year.

Silicon Panels Will Help First Solar De-Risk Its Product Mix

First Solar’s Cd-Te panels were typically seen as the cheapest way to generate solar power despite their disadvantages of lower efficiency and larger sizes since they cost around 20% less than conventional silicon based panels. Over the past two years however, Cd-Te panels have practically lost their price advantage as polycrystalline panel prices plummeted due to lower raw material costs and stiff competition from Chinese manufacturers. Over last year alone, polycrystalline panel prices fell by more than 30% to under $0.70 per watt. In comparison, First Solar’s panel cost per watt declined from around $0.73 to around $0.67 (barely 10%). Polycrystalline panels now have prices that are similar to First Solar’s panels and they still hold an edge in terms of conversion efficiency (around 15% vs. 12.9% for First Solar) and durability. Additionally polycrystalline panels have slightly lower balance of systems costs since they require less mounting equipment. (See Also: Are First Solar’s Thin-Film Panels Falling Behind?)

To overcome these disadvantages, First Solar shifted its business focus from supplying standalone panels, which would find it difficult to compete in a market flooded with cheap and efficient silicon panels, to building large scale solar power plants. Panel efficiency is less critical to solar farms since most systems are ground mounted on large areas of land. If the firm continues to bank solely on Cd-Te, it could face a significant threat particularly if polycrystalline panel prices fall further, since customers would opt for developers who used cheaper and more compact silicon based panels.

TetraSun’s Silcion Technology Looks Promising And It’s Ideal For Rooftop Applications

First Solar says that TeraSun’s proprietary technology has some important features that set it apart from conventional silicon panels. Firstly, the panels require fewer manufacturing steps and also eliminate the use of expensive raw materials such as silver and transparent conductive oxides, which should help to bring down pricing. Secondly, these panels supposedly perform better in hot climates compared to their conventional silicon counterparts, making them ideal for regions like the Middle East, Africa and India. First Solar expects the technology to yield cells with efficiencies of around 21% (which is around 3-4% higher than polycrystalline cells available currently) at costs that are comparable to silicon based cells.

The technology gives the company access to the rooftop solar market, which it has for long neglected due to a lack of high efficiency panels in its portfolio. Expanding into the rooftop space will allow First Solar to diversify its revenues stream away from the utility scale projects business, which currently accounts for more than 65% of its revenues. The residential solar market is typically more stable compared to the utility scale market, which involves bidding for large scale projects. The silicon panel line will allow First Solar to compete more directly with SunPower (NASDAQ:SPWR), a firm that is known for its high end rooftop panels.

First Solar intends to begin commercial scale production for its silicon panels during the second half of 2014 and will initially market these panels in Japan, which is a market heavily geared towards high-end panels.

Sunny Guidance For 2013 Pushes Stock Up By 45%

Separately, during the company’s analyst day program, the management provided its financial projections for 2013 guiding earnings of between $4 and $4.50 per share on sales of between $3.8 billion and $4 billion, which was significantly higher than what analysts had previously expected. Analysts polled by Thomson Reuters forecast an EPS of around $3.51 on revenues of about $3.12 billion. [2] The stock rallied more than 45% in Tuesday’s trading to close at around $39. The company expects to ship between 1.6 GW and 1.8 GW of panels this year and estimates that the number could grow to as high as 2.7 GW by 2015.

While we have revised our price estimate for the company from around $27 to about $31 following the guidance numbers, we still believe that the magnitude of Tuesday’s rally wasn’t really warranted. It’s likely that the markets are overestimating the prospects of the firm and the solar industry as a whole. Our price estimate represents a 25% discount to the market price and reflects concerns about the firm sustaining and growing its position in the projects space (which has relatively low barriers to entry) and also on the firm’s ability to bag new contracts. We are also mildly concerned about the fact that the firm’s bread-and-butter Cd-Te panels which currently drive most of its business could be losing their edge at least in the near-term.

Notes:

  1. First Solar Press Release
  2. WSJ

Disclosure: No positions

Source: First Solar's Acquisition Of TetraSun Highlights A More Diversified Strategy