First Solar - Growing Confidence In CdTe Technology

| About: First Solar, (FSLR)
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Summary

First Solar recently abandoned its high-efficiency silicon TetraSun line in order to focus on its CdTe technology.

As First Solar is essentially betting on utility-scale solar with its CdTe thin-film technology, the company is discounting residential solar's growth potential at its own peril.

Given First Solar's rapid advancements on the CdTe technology front, the company should be able to increase its global utility-scale solar market share.

First Solar (NASDAQ:FSLR) has experienced an enormous amount of success on the CdTe (cadmium telluride) front over the past few years. In fact, the company is now so confident in its CdTe thin-film technology that it is abandoning its $100 million high-efficiency silicon TetraSun line. Instead, First Solar will use its Malaysian line for CdTe series 5 module assembly. While the failure of First Solar's TetraSun acquisition appears to be bad news, it is more indicative of the company's growing assurance in its CdTe technology.

First Solar's CdTe thin-film technology is proving to be highly cost-competitive against even the notoriously low-cost Chinese silicon solar technology. Despite the fact that First Solar is one of the few major solar firms that focuses on CdTe, the company is progressing its technology at an extremely fast rate compared to the general industry. In fact, First Solar recently reported that its lead manufacturing lines were manufacturing modules with efficiencies of 16.4% in Q4 of 2015.

What's more, First Solar's commercial CdTe technology still has far more room to improve. Back in February, First Solar announced that it achieved a record-breaking CdTe cell conversion efficiency of 22.1%. The rapid progress of First Solar's CdTe thin-film technology has put the company in an incredibly strong position. In light of First Solar's accomplishments on the CdTe thin-film arena, the company may no longer need its high-efficiency silicon TetraSun line. In fact, First Solar itself admitted that its TetraSun acquisition was a hedge in case the company's CdTe technology started falling behind.

Growing Dominance in Utility-Scale Solar

Whereas First Solar's future was incredibly uncertain just a few years back, the company is now regaining and even expanding its foothold. The company's rapid progress on the CdTe thin-film front has allowed the company to become a dominant developer despite the cutthroat competition from Chinese solar companies. While First Solar's modules are still not as efficient as efficiency leaders like SunPower (NASDAQ:SPWR), they are far cheaper. This has allowed First Solar to cement a sizable foothold in the larger-scale solar markets.

First Solar is the leading US utility-scale solar developer with ~2.4 GW of projects under development. With massive developer SunEdison (OTCPK:SUNEQ) facing a major restructuring, First Solar will likely extend its lead in its markets. As First Solar's cost roadmap looks more robust than ever, the company's future in the larger-scale solar markets looks secure. Unless a radically more cost-effective solar technology emerges in the near-term, First Solar is set to grow its influence in utility-scale solar. The ramp-up of the company's new and highly cost-effective series 5 module should give First Solar an even greater opportunity to increase its market share.

Growing Questions Regarding Residential Solar

First Solar's lack of presence and general technology disadvantage in the residential solar sector could prove troublesome down the road. If the residential solar continues to grow at its current rate, First Solar will be left out of a huge solar segment. However, utility-scale solar is not going anywhere for the foreseeable future, which is clearly good news for First Solar. First Solar seemingly believes that residential solar will not be nearly as dominant as many believe. In fact, First Solar's previous CEO Jim Hughes, who just recently stepped down, believes that "we're going to see the dominance of community solar as opposed to residential dominance."

By abandoning its high-efficiency silicon experiment, First Solar is essentially betting that smaller scale distributed solar markets like residential solar will not become a significant portion of the solar market in the future. Despite First Solar's pessimism regarding residential solar, residential solar does not appear to be going anywhere. Although there has been a recent slowdown among top national residential solar installers, the industry as a whole continues to grow at an extremely rapid rate.

In Q1, the top three US residential installers experienced 38% growth while the top 4 to 10 residential installers experienced 69% growth. The residential solar industry is experiencing such rapid growth despite the harsh regulatory headwinds plaguing the industry. Given the inherent advantages of on-site solar, the residential solar industry has a bright future ahead of it. With First Solar now betting almost exclusively on its CdTe technology, the company can only hope that residential solar does not continue to gain momentum.

Fortunately, First Solar's CdTe technology could even become competitive for smaller-scale solar projects if the company continues to innovate at its current torrid pace. Moreover, First Solar has a strong balance sheet and first-rate engineering capabilities, which would make a technological shift feasible should the need arise. With the rapid advancements of solar perovskite technology, even silicon manufacturers may need to transition in order to compete on the efficiency front down the line. If a new material like perovskite were to become the most cost-effective in solar, which could very well happen according to numerous recent experiments, First Solar should be at an advantage compared to its peers given the company's strong balance sheet.

Conclusion

First Solar's core CdTe thin-film technology is proving to be more viable than ever. First Solar is set to continue growing its market share in the utility-scale solar market. Despite the fact that First Solar has a strong balance sheet and rapidly improving technology in a growth industry, the company still only has a forward P/E ratio of ~15. Even if the industry transitions to smaller-scale solar installations over time, First Solar is still undervalued.

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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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