First Solar (NASDAQ:FSLR) is up over 36% during the last three months due to the impressive earnings and a robust outlook. The stock has been performing well during the last twelve months and it has gained over 83% during the period. The growth shown by the company and the future growth prospects justify the increase in the stock price. In this article, we will take a look at the future prospects of the company. First, we will take a look at the industry demand of solar power. We will also take into consideration the two most important aspects of the Solar Power industry i.e. cost and efficiency of the company's product. Based on these factors we will draw a conclusion about the company's growth in the future.c
Utility Scale Market
The previous year was profitable for solar power companies derived by strong demand and higher prices. The installations grew by 58%, of which, utility-scale market accounted for 60%. This presented opportunity to the manufacturers motivating them to produce more. As a result, the market went into an oversupply. Now the demand is rising again and may absorb the oversupply of the solar energy products in a few months. However, the growth may be slowing down in the U.S. as Goldman Sachs reported that the utility-scale solar projects are likely to grow at roughly 8% till 2016. The slowdown in the growth of the utility-scale market might impact the growth of the company - however, the opportunity in the developing nations is huge as those countries are yet to use solar energy as a primary source of power generation. First solar dominates the commercial market and is uniquely positioned to gain from this growth opportunity in the overseas markets.
According to BNEF, expenditure on new solar power has increased by 23% to $27.5 billion as compared to the previous year. The important thing to notice here is that $21.2 billion worth of these projects were of less than 1MW (megawatt). This shows that solar power has higher demand in the form of smaller projects, which also includes residential rooftop solar grids.
Growth Opportunity in the Small Scale Projects
Demand of solar power in utility-scale projects has slowed over the last year with an expected growth rate of 8% as discussed above. However, the demand for solar grids on the rooftops for small individual projects is increasing as the smaller projects are being preferred. Goldman Sachs reported that the demand of this market could increase with a growth rate of 45% annually in the next three years. In 2013, this market grew by 41% representing improved demand. However, its competitor, SolarCity (NASDAQ:SCTY) dominates this market, which may give First Solar a hard time in capitalizing on this opportunity.
In 2013, the company produced 1,600 MW of solar panels derived by strong industry growth. This year, the company expects to produce 1,900 MW of solar panels representing a growth of 18.75% in production. Therefore, we can expect improvement in the revenues this year.
Improving Cost and Efficiency
First Solar has always been ahead of its competitors in terms of efficiency. The company held a world record in photovoltaic conversion efficiency of 16.1%, which was recently enhanced further by First Solar to 17%. The company also set a world record for CdTe research cell efficiency of 20.4%. In addition, it acquired TetraSun last year. However, its mainstream production is still optimized with a much older efficiency of 14.2%.
Cost per watt is another important factor to consider in this industry as it has been one of the primary reasons for clean energy not becoming mainstream. First Solar has a clear advantage in this area with manufacturing cost per Watt of $0.53, which represents a decrease of 17% from per watt cost of $0.64. However, the installed cost is around $1.59 per watt, which should also go down as the cost for panels comes down. First Solar presently has a cost advantage over its competitors and in the coming years, this advantage is expected to allow the company to maintain an edge over its competitors. As a result, the cost and efficiency of the company can gain a better market share in the next three years as the company brings the improved technology and cost efficiency to the market.
First Solar is uniquely positioned to exploit the growth opportunity present in the market at the moment. The growth in the utility-scale as well as rooftop grids will be rapid over the next few years - utility-scale growth is expected to come from developing nations and the rooftop growth is gathering pace in the developed world. Furthermore, the efficiency and cost advantage of the company should allow it to capture a larger market share and enhance its profitability in the short-medium term. Despite its recent surge in the stock price; First Solar remains an attractive investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.