First Solar Inc. (NASDAQ:FSLR) has been a solar technology darling over the past 24 months. Its share price has risen from under $12 in May of 2012 to last Friday's closing price of $57.07. For anyone who purchased back then, it has provided tremendous returns. However, looking further back, we see that FSLR traded above $100 in 2009-2010 and parts of 2011. FSLR had even eclipsed $300 a share in 2008. So at first glance, $57 still sounds like a great deal, right? Its P/E of ~15 also seems very reasonable in comparison to the broader market. However, for FSLR to perform, it needs to continue to grow and there are increasing doubts about those prospects, especially in light of its recent guidance about Q1 2014.
A Tale of Two Technologies
There are two main technologies for photovoltaics: crystalline and thin film. Brightsource's technology is not photovoltaics since the sun's energy is used to generate steam, which is used in a generator to produce electricity. Photovoltaics is the direct conversion of solar energy (quanta) into electricity (electrons).
FSLR has been almost exclusively focused on manufacturing thin film solar modules based on Cd-Te (cadmium telluride) technology. Other thin film technologies are CIGS (copper-indium-gallium-selenide) and amorphous silicon. FSLR is one of the world's leading manufacturers of photovoltaic modules and the leading manufacturer for Cd-Te thin film.
However, there are many other manufacturers in the crystalline space, including SunPower Corp. (NASDAQ:SPWR), Yingli Green Energy (NYSE:YGE), Canadian Solar Inc. (NASDAQ:CSIQ), and Trina Solar Limited (NYSE:TSL). There are some other differences between the technologies as well. Thin film modules tend to have a much lower watt density than crystalline technologies. For this reason, thin film technologies are rarely used in the rooftop installations made popular by SolarCity (NASDAQ:SCTY) and SunEdison Inc. (SUNE).
This tale of technologies is the first hint that FSLR might feel that its core business is threatened. In April of 2013, FSLR signed an agreement to acquire TetraSun, a manufacturer of silicon cells. There is an expectation that FSLR will begin introducing products in 2014 in the distributed solar generation space.
FSLR's growth prospects are also linked to its business model
FSLR is a vertically integrated solar company that both manufactures solar modules and constructs the downstream projects. As noted in the "Tale of Two Technologies" section, FSLR is focused on larger scale solar installations. In contrast, the crystalline companies also sell their product to third party installers for rooftop installations, which have taken off dramatically with rise of zero money down solar. The drivers behind the larger scale projects have been Renewable Portfolio Standards, primarily from California. While this has been a potent force to move the industry in the U.S., California is now on pace to meet its goals for 2020, thus reducing the need for new large scale projects. FSLR tapped into this market through key acquisitions, including NextLight Renewable Power LLC, a solar developer that provided FSLR with a 1.1 GW project pipeline in 2010. However, one of NextLight's largest projects, 290 MW Agua Caliente is nearing final completion with several portions already up and operating. Clearly there is a shift in markets in the U.S. with an increasing emphasis on smaller scale distributed solar.
Will international markets provide growth for FSLR?
Solar is without question a global industry that was pioneered by Germany. It is estimated that when the final numbers are tallied, the U.S. will have installed more capacity in 2013 than Germany by a slim margin around 4.3 to 4.2 GW. While the U.S. should continue to grow by double digits to over 6 GW in 2014, this will be a little more than 10% of the global market that year.
However, the story of 2013 was the meteoric rise in China installations with ranges going from 9.5-12 GW, easily surpassing Germany and the U.S. combined, after having only installed 5 GW in 2012. It is expected that China will also quickly replace Germany in terms of total GWs installed with another 12 GW of installations targeted for 2014. With a large range of Chinese crystalline PV manufacturers in China, one would expect FSLR to be at a relative disadvantage.
Another emerging growth market is India, which installed almost 1 GW in 2012. India's need for energy and solar's relatively easy deployment suggests solar will continue to grow with a target of 10 GW by 2017. However, with local content requirements, FSLR may have limited opportunity since it only has manufacturing facilities in the U.S. and Malaysia.
Other leading markets still include Germany, with a strong base of local manufacturers and Japan with 2 GW installed in 2012 and is more focused on distributed scale solutions (hence the FSLR acquisition of TetraSun from JX Nippon Oil & Energy Corporation and other investors).
FSLR has had a strong run; however, it will have to continue to find growth avenues with an increasing importance of international markets. While it has done well in its core of U.S. megaprojects, FSLR will have to adapt quickly to a changing marketplace.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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