In recent years, alternative energy has grown immensely in both popularity and use, as nations across the globe seek to end the fossil fuel addiction by which modern society is currently saddled. While there are various forms of renewable energies, one of the most popular and practical comes in the form of solar energy. Solar energy is generally derived from photovoltaic modules, which are usually made from crystalline silicon to help capture the sun’s light. With the sun being a never-ending source of energy (at least for our lifetimes), it is no surprise to see a wealth of companies make a move into the solar industry, with one of the best-known companies being First Solar (NASDAQ:FSLR).
First Solar was founded in 1999 when the company Solar Cells was purchased by True North Partners and re-branded to today’s current name “First Solar, Inc.”. The company went public in 2006, trading on the NASDAQ, though it would later become the first ever pure alternative energy company to be a component of the S&P 500. The company has a long list of honors and nods as an industry leader; in 2010 First Solar ranked seventh on Fortune’s fastest growing companies, and in 2011 was given the nod as the number one ranked company on Forbes’ 25 fastest-growing tech companies in the U.S. And best of all, tactical business decisions have provided the groundwork for a strong future: “even if the stock market crashed tomorrow, these guys would have the cash to keep growing” said David Thomson referring to the very low debt levels the company has taken on to this point.
First Solar’s main business comes from the development of photovoltaic modules which utilize cadmium telluride (CdTe) as a semiconductor for power. This departs from the norm of the industry, as silicon-based modules are more efficient, but far more costly than CdTe. Also CdTe operates in a much wider variety of light and temperature conditions, which has given First Solar a considerable leg up on its competition in a variety of markets.
The company has seen great success thanks to its competitive pricing, as it was the first solar company to lower manufacturing costs below $1-per watt, making the energy prices of these modules competitive with more conventional energy sources. By 2014, the company is predicted to lower costs all the way down to approximately 53 cents per watt, which may make it considerably more competitive when it comes to providing energy for citizens all across the globe. First Solar operates in a number of countries around the world, including Germany, Malaysia, Vietnam and others. For the time being, the company continues to predict lower expenses, more efficient modules, and has plans to place more modules as time goes on, creating an exciting growth potential for this firm and industry as a whole.
As for the solar industry as a whole, predictions as to its future output seem foggy. Depending on which analyst you ask, some believe that it has an extremely strong future citing many different predictions that involve a major uptick in the usage of solar power overall. On the other hand, others believe the industry will quickly be coming to a halt, as it has grown so quickly that supply may soon outstrip demand. The truth likely lies somewhere in between, as nobody can say for sure what will happen with this, or any other means of energy production over the next decade. What First Solar can say for certain, is that three separate solar projects in California have been offered conditional federal loans (totaling to roughly $4.5 billion), sponsored by the U.S. Department of Energy. These projects will create 1,400 jobs and 1,300 mega-watts of new, clean energy, helping the industry to grow more at home as well.
While First Solar is aiming to ramp up its operations, it faces stiff competition from numerous firms across the globe. Chinese companies account for the bulk of the competition, with big name firms like Trina Solar (NYSE:TSL) threatening to take away some of the massive market share that FSLR has developed. Other major competitors from China include JA Solar (NASDAQ:JASO), Yingli Solar (NYSE:YGE), and Jinko Solar (NYSE:JKS). Investors in this company should bear in mind that 61.3% of its operations come form international countries (not including Germany which makes up 13.8% on its own), so markets abroad will have a heavy impact on this U.S.-based company.
Risks and Rewards
As with any alternative energy company, First Solar will come with its fair share of risks. For the time being, solar energy only accounts for 0.08% of total U.S. energy supplies as of 2010, while other forms of clean energy, like wind and biomass, take much more substantial allocations. Some may see this small figure as an opportunity, while other may see it as a reason to steer clear of any kind of solar-based investment. Another major risk comes from oil supplies; as companies continue to find new resources or gain the ability to tap into fields that were once out of reach, oil will likely remain one of the cheapest forms of energy. Though this can also work in the opposite direction; if oil supplies dwindle or production becomes too expensive, solar may be a good option to turn to for many cost conscious firms.
Government subsidies are another big factor when it comes to energy production. Right now, the majority of U.S. subsidies are granted to oil firms, making it more difficult for alternative energy companies like FSLR to penetrate the market. But if the subsidy system was shaken up, and tilted towards solar power, the outlook for First Solar could be extremely different. Also consider that the government could favor a more popular alternative energy in this situation, potentially leaving solar in the dust. Overseas, solar operations are looked upon far more favorably and are often greeted with more tax breaks and incentives. This tends to favor FSLR because the firm does more operations abroad than at home, and as such, investors should closely monitor how subsidies and policies are behaving in countries like Germany and other nations in the EU in order to gather more clues about the risks and rewards of investing in this company.
Over the last year, FSLR’s stock price has been relatively volatile, although year-over-year it is currently just about flat. Investors should note that while the price was above $300 per share just before the recession hit, the price has straddled back and forth from the range of approximately $110 and $160 per share ever since. This may be especially concerning considering the fact that major equity benchmarks have rebounded from their recessionary lows while FSLR has been stuck in the middle, failing to match broad indexes. Though, it is important to note that FSLR is not alone in being range-bound, as the Guggenheim Solar ETF (NYSEARCA:TAN), which is representative of the entire industry, has been stuck in a similar pattern as well.
One of the first things to notice about this stock is its high liquidity, with over 1 million shares traded daily, and a market cap of $10.4 billion, this stock will be perfect for both active traders and the more traditional “buy and hold” investor alike. But a closer inspection into the company’s statistics reveal both positive, and negative information that may change the way you look at this company. On the plus side of things, FSLR has a healthy cash flow of $555 million, with just $132 million in debt. Furthermore, FSLR has a current ratio of 2.97; a solid figure that will comfort most investors as it suggests that the company will have no trouble paying off any debts.
On the other side of things, a few key stats may concern some investors. First, the stock has a very high beta of 1.7, making it incredibly susceptible to market runs in either direction. The quarterly earnings growth (yoy) may also be of concern, as it is currently sitting at -32.7% (as of 7/25/2011). Another disturbing figure comes from taking a look at the short interest, while there are 86.16 million shares outstanding, there are 20.85 million held short; nearly 25% of the shares out in the market. Finally, investors should note that FSLR has a fairly high amount of shares held by insiders, nearly 35% of the total.
First Solar is a strong company with a good business plan, but that may not always pan out to gains from an investment standpoint. The current environment for solar is pretty bleak; with governments around the world trying to stay afloat with mounds of debt, solar energy is just about the last thing they will be spending money on, creating a foggy future. Also, note that the stock is relatively inconsistent, which may be attractive to some, and off-putting to others. If FSLR can meet their predicted costs outputs in the future, and become more competitive with more traditional fuels, investors could be in for a big gain, but in the meantime this stock will be a risky, but potentially very rewarding, component to your portfolio.
Disclosure: Chart courtesy of Barchart. No positions at time of writing.