The solar energy industry has taken off. Some analysts may argue about solar energy's subsidies and point to unfavorable metrics compared to natural gas. But these short sighted analysts are increasingly in the minority, and are bound to change their views when the solar deployment invariably crosses the early-adopter stage. With continuing drop of Levelized Cost of Energy (LCoE), solar is proving to be increasingly cost-competitive with fossil fuels in many situations, and is unarguably in the first growth stage of this technology's S-curve.
When we talk about First Solar (NASDAQ:FSLR), it is in the context of this technology S-curve. Is First Solar is well-positioned to ride the technology S-curve and create an enormous amount of wealth for its shareholders? Or, is FLSR going to be an also-ran second or third-tier player in what is likely to be a high-growth, but competitive industry?
The answer to us is, FSLR is going to be a wealth creator - a massive one at that. FSLR has one of the most leveraged business models in the industry. This article outlines the company strengths and the key areas of leverage, and the reasons why we believe in this bull case:
- Technology: For several years, FSLR was known for its low-cost, low-efficiency solar technology. Its Cadmium Telluride (CdTe) panels and Balance of System implementations, while having some key technology benefits, largely limited FLSR attractiveness to utility-scale solar farms. The limitations of FSLR's technology shut the company out of the high-growth commercial and residential solar deployments. The slowdown in the utility sector has made people wonder if FSLR's best days are behind it. That, we will show, is about to change in a big way for several reasons:
o FSLR's technology investments are starting to pay off, and CdTe is expected to reach efficiency parity with the multicrystalline silicon in 2014. The CdTe technology is expected to improve further and reach the efficiency levels of monocrystalline silicon by the end of 2016. This development has the potential to make FSLR the low-cost and the high-efficiency leader in the industry. This strengthens FSLR, both in terms of competitiveness and margins - a key LEVERAGE point. This efficiency increase will also give FSLR unprecedented opportunity to become a high-volume module supplier. Expect to see dramatic growth in CdTe module business going forward.
o FSLR's purchase of TetraSun technology in 2012 is starting to yield results. TetraSun's monocrystalline silicon technology is expected to be in production by the end of 2014. With high-efficiency panels comparable to SunPower, but at a lower cost, this technology is extremely attractive in space-constrained applications, such as in homes and commercial rooftops. TetraSun enables FSLR to effectively enter a market segment where it only had a very limited presence in the past. The upside to this business is only limited by how quickly FSLR can ramp TetraSun manufacturing. Look for a steep volume ramp in 2015. While initial TetraSun production may go towards captive projects and customers, look for FSLR to be a major force in the high-performance silicon module business by 2016 - further LEVERAGE!
o The dual CdTe/TetraSun technology roadmap not only enables FSLR to optimally target various market segments, but also dramatically reduces FSLR's execution risk.
o A key factor to take into consideration here is that FSLR is one of the few players in the industry with the earnings power and the balance sheet to continue to make the technology investments necessary to drive the efficiency roadmap. Most other solar companies have weak balance sheets, and do not have the resources necessary to make the investments required to keep up with FSLR.
- Manufacturing: The technology roadmap is good, but what about manufacturing? Here again, FLSR has a powerful story to tell.
o Increasing panel efficiencies and improving manufacturing processes have dramatically improved FSLR's manufacturing capacity in the last several quarters. And this trend is likely to continue for the next three to five years. What this means is that FSLR will continue to produce more and more panels at increasingly lower costs, with very little additional manufacturing investments. The incremental sales dollars will flow rapidly to the bottom line. LEVERAGE!
o During the first part of this decade, FSLR invested heavily in manufacturing facilities and equipment. As FSLR was investing in manufacturing, solar industry ASPs collapsed and FSLR's growth stalled with the entry of low-cost Chinese manufacturers. To the chagrin of shareholders, FSLR had to dispose some of the excess manufacturing capacity in the last few years, and had to write down much of the excess manufacturing capacity. This idle manufacturing capacity can now come back on line and enable a dramatic increase in capacity, with very little additional capital expenditure. Once again - LEVERAGE!
- Market presence: FSLR is by far the most dominant utility scale solar developer in the world. FSLR has the track record of consistently delivering world-class systems, and is considered a gold standard in terms of bankability. This reputation is likely to serve FSLR well when it starts moving into commercial rooftops in the near future. In addition, FSLR has a couple of partnership vectors that further improve its market presence:
o GE is a well-known financier and developer in the energy industry, and has a marketing and technology development relationship with FSLR. GE also has an equity stake in FSLR from the sale of GE's module making CdTe technology to FSLR. This strategic relationship will give FSLR access to some opportunities that otherwise would have been out of FSLR's reach. LEVERAGE!
o FSLR has been aggressive in the past about acquiring projects from other developers to increase its market presence. FSLR, as a low-cost manufacturer/developer with a strong balance sheet, can use this strategy effectively to increase its footprint. This is not an option that is easily available for the weaker players. Further LEVERAGE!
- EPC and O&M: Over the last several years, FSLR has quietly built large EPC and O&M businesses. In a significant strategic shift, these business groups now provide services to developers, even if they do not use FSLR modules. The O&M business, in particular, is valuable to shareholders because of its very long-term contracted revenue flows. In addition to affording revenue stability, these businesses provide FSLR excellent deployment and long-term data on its own products, and more importantly, on its competitor products.
- Management: A company with good technology in a growing market needs a good management to thrive. Over the last several quarters, FSLR's management team has fallen short on delivering quarterly revenue expectations due to project timing issues, but has demonstrated that it can execute reasonably well in terms of technology and manufacturing. FSLR's management is not only experienced in the solar industry, but its bench is full of executives with past energy industry experience - something that is likely to serve well in the large commercial and utility-scale markets.
With a leveraged technology and manufacturing model, further leveraged by global energy partners, FSLR is likely to see a rapid acceleration in its earnings stream. The opportunity to become a major player in the high-efficiency, low-cost module business will further accelerate FSLR's revenue stream.
While some technology/execution risks exist, the risks are limited. On the technology front, FSLR has already demonstrated the feasibility of much of the efficiency gains forecasted for the next three years. The main challenge for FSLR is to move the technology from proof-of-concept stage to high-volume manufacturing. On the manufacturing front, the dual CdTe/TetraSun provides considerable margin for delays and setbacks. FSLR is the only solar player in the industry that has this luxury. Given the somewhat low-risk execution path, FLSR's earning will likely far outstrip current management guidance going forward. It doesn't hurt that the rising solar industry tide lifts all the boats.
Quarterly earnings for FSLR may be somewhat unpredictable, but assuming a reasonable execution on the technology and manufacturing roadmap, FSLR's earnings will likely exceed management forecast by 50% or more for the next three years. With excellent execution, earnings of $10 a share is likely in 2016. With even a somewhat uneven execution, the stock could easily double or triple by the end of 2016.
The key risk factor for this thesis is the pricing of natural gas. If natural gas prices fall to $2/MMBTU or below, and remain at that level for the next 5 to 10 years, there is not much of a doubt that many utility and large commercial customers will prefer natural gas to solar, and that will crimp the growth of the solar industry. Assuming a more reasonable flat to up natural gas pricing, we believe that FSLR has all the signs of being a rapidly growing company for the next decade.
Disclosure: I am long FSLR. 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.