The past six months have been tough for First Solar investors (NASDAQ: FSLR), as the stock has tumbled by 42%. Hence, the big question is whether there will be a further decline in the share price. The answer to this question is yes, as my outlook on the stock is extremely bearish. Thus, to explain the reason behind my outlook, I shall firstly look at the firm’s general overview in which we shall sneak a peek at the operating segments. After this, we shall analyze the company’s financial health and its weak points.
First Solar is ranked as one of America’s leading renewable energy companies. The firm has managed to reach this rank through the use of a proprietary semiconductor technology that enables it to design and manufacture efficient solar power modules. The solar modules have a thin layer of film material which facilitates a more efficient conversion of sunlight into electricity. This technology has enabled the firm to expand its footprint globally, as its products are ranked as one of the best in Germany and China.
The firm conducts its operations through two key segments. The first segment is a modules division whose revenue came in at $105.3 million in the second quarter of 2018, which constitutes for 34.1% of the firm’s total revenue. This segment, as the name suggests focuses on designing, manufacturing and selling of solar modules. The second key segment of the company is the systems division, whose prime objective is to manufacture PV solar power systems. This segment deals with services relating to project development, engineering, procurement, construction, operation and maintenance. Moreover, this segment is the firm’s highest revenue generator as it accounted for 65.9% of the total revenue. The revenue for the segment in second quarter of 2018 came in at $204 million. Furthermore, this segment is also responsible for fulfilling the financing needs of the firm.
First Solar’s Financial Health
The company’s financial well-being is another factor that makes me worry about any investor who may think of going long on the stock. First Solar in the second-quarter of 2018 reported a loss of 46 cents per share against an anticipated loss of 1 cent per share. The firm’s revenue came in at $309.3 million, which was lower than the predicted rate of $479 million. This resulted in the company having a net loss of $48.5 million. This loss occurred due to the company being forced to lower the prices of its solar panels owing to higher competition levels and lower demand. However, I believe the tsunami of bad financials isn’t about to end, as several analysts have predicted a 24% drop in demand levels. This will result in First Solar lowering its module prices by another fifteen to thirty percent, which will be disastrous for its share price.
The financial performance took a further hit, as the cash and cash equivalents fell to $2,024.5 million from a prior value of $2,268.5 million. Moreover, the company’s long term debt rose to $448.5 million from a prior value of $380.5 million. The only statistic that came in at a positive level was cash and marketable securities which rose to $3.1 billion from a prior value of $2.9 billion. This increase was due to sales proceeds from the sale of its stake in 8point3 Energy Partners (NASDAQ: CAFD).
So Why Should I Sell This stock:
All the leading names in the solar industry have had one hell of a tough year as the level of demand has severely slumped, whilst the level of supply is up. This has resulted in solar manufacturers fighting for sales by lowering panel prices which has resulted in their finances getting worse. Thus, due to this I expect all solar stocks to face a tough time in the latter part of 2018. However, I think there is more than meets the eye when it comes to the problems of First Solar. Therefore, I shall look at five fundamental weaknesses relating to First Solar which indicate to investors that this stock is a sell.
The first reason why investors should sell the stock is due to U.S. based solar firms facing an uncertain future. This occurred after President Trump’s shifted the nation’s focus towards more conventional energy sources such as coal, oil and gas. The risk was then multiplied by his pessimism over the global climate change scenario. Consequently, all of this had a devastating impact on First Solar’ financials and sales. Furthermore, the last nail in the coffin was placed, when President Trump’s announced that he is pulling out of the Paris climate agreement. This in my view caused a further slump in the demand of solar modules, which in the long term shall cause First Solar to fight for its survival in the American market.
The second reason why investors should question their decision of maintaining a long position in the stock is due to the company’s capital costs. The costs of First Solar have been in incline due to the firm reducing the physical size of its Series 4 modules. To do this the company has had to significantly increase the man hours needed on each module, which has inflated the cost per module. This has been further worsened by the higher costs seen in manufacturing the “Balance of Solar PV Systems” ((BoS)). However, we see company trying to fix the ballooning cost issue by developing a Series 6 module. But, I believe this will only worsen the situation as the cost of developing and bringing a new product into a market is extremely high in this industry.
The third reason why investors should unload the stock from their portfolio is due to the industry’s cut throat competition. The key area of competition relates to the ‘selling price per watt’. I chose to focus on this, as First Solar’s competitive advantage in this sphere is in fast decline. This is due to other manufacturers managing to invent their own technological systems that can rival First Solar’s crystalline-silicon solar modules. Thus, I do not expect First Solar to be able to maintain its competitive advantage for long. This shall result in the firm having lower sales down the road.
The fourth reason investors should consider selling the stock is due to the high start-up costs related to the development of the new Series 6 module. This is clear from the results of the second quarter, as the module incurred start-up costs of $24.4 million, which gobbled up 7.9% of the total sales revenue. Even though this new technology may create an upturn in the firm’s growth, I still believe it is just too costly for the firm to execute in the current market conditions. Also, I believe this is one of the reasons that investors have offloaded their shares in First Solar, which resulted in it having a 42% decline in the past six months.
The fifth reason investors should be extremely cautious when investing in First Solar is due to the demand for the company’s products being heavily dependent on government subsidies and incentives. Additionally, the company is also exposed to various stringent regulations and geopolitical risks due to it having an international presence. This I believe shall severely affect the bottom line of First Solar, especially due to the trade war as China is one of its key markets.
Share Price Overview
Take a look at the past one-year chart of First Solar below, with my added notes:
First Solar for the past few months has been trading in a sideways, consolidation pattern, which has resulted in it breaking below its $50 support ((red)) line. Therefore, due to this, I believe it is the perfect time to short the stock, with a stop loss being placed at the $50 level. This supports my view that the stock will be having a strong bearish run in the coming weeks. However, a break back above $50 line would be an opportunity to consider a long position instead.
In the end, I will conclude that First Solar will be having a tough time due to current industry conditions. Thus, I see no long-term potential in this stock until we see a change in President Trump’s tone on renewable energy or till the firm ensures that it relies on Europe more than America. Hence, there is no reason to be bullish on the stock currently.
Thank you for reading the analysis and do share any thoughts you may have in the comments section.
Disclosure: I/we 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.