First Solar SWOT Analysis

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About: First Solar, Inc. (FSLR)
by: David Zanoni
Summary

First Solar has a bright future as the energy industry increasingly adds renewable energy installations.

Explore the Strengths, Weaknesses, Opportunities, and Threats.

Younger generations are showing interest in solar, which will help drive growth for First Solar over the long-term.

First Solar (NASDAQ:FSLR) produces photovoltaic (PV) solar energy solutions on a global basis. The company operates under two segments: Components and Systems. The Component segment handles designing, manufacturing, and sales of cadmium telluride solar modules that convert sunlight into electricity.

The Systems segment provides solar power system solutions including: project development, engineering, construction, and operating/maintenance services to power producers, utilities, and commercial/industrial companies.

First Solar faced challenges over the past decade. However, the company has better growth prospects going forward. About 64% of Millennials polled by Deloitte stated that they are interested in installing solar panels. The Millennials are currently the largest living generation in the U.S. Therefore, this generation is likely to drive strong growth for First Solar as the industry gains growth momentum over the next five years.

First Solar Investment Thesis

Source: First Solar December 2018 Investor Presentation

Strengths

  • First Solar is the largest producer of thin film semiconductor cells for use in solar systems in the world. As of September 30, 2018, the company's total installed annual production capacity across all of its facilities was 5.2 gigawatts (GW). That is the equivalent in power to 16.25 million PV panels or 2,241 utility-scale wind turbines or 6.76 million horses. It could also power 4 of Marty McFly's and Doc Brown's DeLoreans to travel "Back to the Future" (their time machine needed 1.2 GW of electricity).

  • Experienced company for achieving success in new markets. This will help First Solar continue its expansion on a global basis. The company plans on expanding production capacity by 46% to 7.6 GW by 2020.

  • Solid track record of innovating by developing new products. One example of this is First Solar's Series 6 PV modules, which have up to an 8% higher energy yield and a lower levelized cost of electricity (LCOE) as compared to competing technologies.

  • Strong distribution network that effectively reaches its customers.

  • Highly skilled workforce as a result of investments in training and development.

  • Strong supply chain, which includes reliable raw material suppliers. First Solar is also vertically integrated across the solar value chain.

  • Strong balance sheet: 5.8x more total cash than total debt; current ratio of 4.5. This gives the company flexibility to expand.

First Solar at a Glance

Source: First Solar December 2018 Investor Presentation

Weaknesses

  • First Solar has been running with negative operating cash flow for the past two quarters. The company also has high CapEx, leading to negative free cash flow.

  • The company has low profitability ratios: ROE of 2.8%, ROA of 3.06%, and ROIC of 1.67%.

  • Low EBITDA margin of 9.36%, and operating margin of 1.79%.

  • Note: These metrics have been improving and can continue to improve if First Solar gains operational efficiencies and gets better returns for its R&D spending and other investments.

Opportunities

  • First Solar can capitalize on the growing interest in solar installations by the Millennial generation. The company can market to this generation by considering entering the residential market.

  • First Solar can look for opportunities to improve its technology for various products. Continuous innovation can be employed to get higher energy yields from its PV modules and greater efficiencies from battery technology.

  • Expand into emerging markets: First Solar has the potential to get solar fields built in growing economies on the utility/industrial scale.

  • Keep an eye out for strategic mergers/acquisitions. There is an opportunity for M&A within the next five years for other innovative companies that could help First Solar grow over the long-term.

  • Capitalize on any new energy/environmental policies. Worries about climate change make the likelihood of new policies being made on a global basis that favor renewable energy sources such as solar. Therefore, First Solar can jump on this as it unfolds.

Threats

  • FSLR faces high competition from SunPower (SPWR), Canadian Solar (CSIQ), Trina Solar, SolarCity (TSLA), SunEdison (OTCPK:SUNEQ), Yingli Green Energy (YGE), JA Solar, Sungevity, and Vivint Solar (VSLR). The competition could lead to price wars, which could lower the price of PV modules and solar systems. The lower prices could reduce the revenue for First Solar.

  • First Solar is subject to an oversupply of PV modules in the market. This could lower prices for the company's products and reduce revenue.

  • Tariffs could reduce demand for First Solar's products.

  • The demand for the company's products could change based on government subsidies for renewable installations. Reduced subsidies would have a negative effect on revenue.

  • Subject to seasonal demand for its most profitable products.

  • Increased cost of raw materials would reduce margins and lower profitability.

  • First Solar is subject to currency fluctuations as a result of its global operations.

  • The stock can correlate to the price of oil, which creates additional price volatility.

Long-Term Investment Outlook

Overall, First Solar has an abundance of strengths and opportunities for strong growth potential over the next three to five years. The largest living generation, the Millennials, has shown strong interest in solar technology. The perceived threat of climate change creates more demand for solar installations as the world looks for ways to have more sustainable energy solutions. This will help the company grow as its technology is increasingly embraced.

First Solar is highly cyclical and could experience downturns more frequently than the broader economy due to the potential for an oversupply of PV modules in the market. Due to this cyclicality, the stock can lose more than half of its value in less than one year. The company does face a lot of external threats. As a result, the stock can be more volatile than average and should be viewed as riskier than average.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: The article was written by David Zanoni with guidance from Kirk Spano.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.