Insights

First Solar Is Eyeing Long-Term Growth

The solar industry has felt pressure from a number of sides recently as interest rates rise and commodity and labor costs increase. That’s sent solar stocks plummeting, and there are questions about the industry’s trajectory. 
What First Solar (NASDAQ: FSLR) confirmed with its recent earnings report is that the solar industry is alive and well. Profits may be turbulent, but demand for solar products is improving, and there could be significant growth ahead. 
Image source: Getty Images.

The numbers
I’ll start with the quarter’s operating results, which weren’t great for First Solar. The company reported a 54% drop in revenue to $367 million and a net loss of $43.3 million, or $0.41 per share. After accounting for $154.8 million invested in capital expenditures, First Solar’s free cash flow was negative $293.6 million in the quarter.
Margins were hurt by higher commodity costs, start-up expenses at new manufacturing plants, and shipping. But management is adjusting how it structures contracts, and that’s good news given incredible momentum in the solar market. 
A surge in bookings
What jumped out to me was the 11.9 gigawatts (GW) of bookings between April 1 and April 28 of this year. That’s more than the roughly 8 GW of production the company has today, and is more solar panels than were installed globally in 2009 (7.4 GW). Total bookings now stand at 36.4 GW.
Management was eager to point out in the quarterly conference call that contracts now include commodity adjustments and some shipping hedges, as well as sharing provisions if the U.S. solar investment tax credit is extended, which would involve First Solar capturing a higher price if these tax credits are extended. Without any sharing, the developer would take all of new or incremental tax benefit on projects. There are also adder provisions for if First Solar delivers better-performing solar panels than what’s currently contracted.
Most of the new bookings have some of these hedges and adders in place. Management said the impact could be $0.03 to $0.06 per watt, which is as much as a 20% increase in revenue per watt and should help margins that would otherwise be extremely volatile in a rising cost environment.
New technology is in the works
The two new factories in Ohio and India are expected to produce a Series 7 module that’s larger than the current Series 6 Plus. This should improve costs and margins when operations begin in 2024. The factories are expected to double production
There are two new products in the pipeline that could get First Solar into residential solar as well. The company is developing a multijunction module that it says could reach 25% efficiency (average industry efficiency is under 20%), and there’s a project with SunPower to develop a dual-layer module with thin-film and crystalline silicon together. This is another growth opportunity in a new market for First Solar, although residential products aren’t expected to generate revenue until 2023.
Policy questions remain
I mentioned that First Solar’s management is hopeful that the solar investment tax credit will be extended, and is planning to capture some of that upside. But they also talked at length about pushing for increased support for manufacturing incentives in the U.S. 
First Solar is the largest U.S. solar panel manufacturer, so it has an incentive here, but there is a bill called the Solar Energy Manufacturing for America Act that has passed the House of Representatives and is in the Senate right now that is aimed at helping the industry. The current bill calls for up to $0.11 per watt in tax credits per solar module, which compares to First Solar’s sale price of $0.27 per watt in the first quarter. Investors shouldn’t price in this credit, but if it happens there could be a massive boost for First Solar.  
What to think about First Solar’s latest report
There’s clearly a lot of demand for First Solar’s modules right now. And with two new manufacturing plants being built that will double production, there could be significant capacity growth ahead. 
I also like that First Solar is pushing its own technology forward with high-efficiency solar panels. These may not all reach mass production, but it’s the kind of push investors should like to see. 
Long-term, this is a solar stock I think will do well, although the ride will be rocky. But given the recent sell-off, this could be a great buying opportunity if you’re willing to hold until First Solar’s growth really kicks in. 
Travis Hoium has positions in First Solar and SunPower. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy. –

The solar industry has felt pressure from a number of sides recently as interest rates rise and commodity and labor costs increase. That’s sent solar stocks plummeting, and there are questions about the industry’s trajectory. 

What First Solar (NASDAQ: FSLR) confirmed with its recent earnings report is that the solar industry is alive and well. Profits may be turbulent, but demand for solar products is improving, and there could be significant growth ahead. 

Image source: Getty Images.

The numbers

I’ll start with the quarter’s operating results, which weren’t great for First Solar. The company reported a 54% drop in revenue to $367 million and a net loss of $43.3 million, or $0.41 per share. After accounting for $154.8 million invested in capital expenditures, First Solar’s free cash flow was negative $293.6 million in the quarter.

Margins were hurt by higher commodity costs, start-up expenses at new manufacturing plants, and shipping. But management is adjusting how it structures contracts, and that’s good news given incredible momentum in the solar market. 

A surge in bookings

What jumped out to me was the 11.9 gigawatts (GW) of bookings between April 1 and April 28 of this year. That’s more than the roughly 8 GW of production the company has today, and is more solar panels than were installed globally in 2009 (7.4 GW). Total bookings now stand at 36.4 GW.

Management was eager to point out in the quarterly conference call that contracts now include commodity adjustments and some shipping hedges, as well as sharing provisions if the U.S. solar investment tax credit is extended, which would involve First Solar capturing a higher price if these tax credits are extended. Without any sharing, the developer would take all of new or incremental tax benefit on projects. There are also adder provisions for if First Solar delivers better-performing solar panels than what’s currently contracted.

Most of the new bookings have some of these hedges and adders in place. Management said the impact could be $0.03 to $0.06 per watt, which is as much as a 20% increase in revenue per watt and should help margins that would otherwise be extremely volatile in a rising cost environment.

New technology is in the works

The two new factories in Ohio and India are expected to produce a Series 7 module that’s larger than the current Series 6 Plus. This should improve costs and margins when operations begin in 2024. The factories are expected to double production

There are two new products in the pipeline that could get First Solar into residential solar as well. The company is developing a multijunction module that it says could reach 25% efficiency (average industry efficiency is under 20%), and there’s a project with SunPower to develop a dual-layer module with thin-film and crystalline silicon together. This is another growth opportunity in a new market for First Solar, although residential products aren’t expected to generate revenue until 2023.

Policy questions remain

I mentioned that First Solar’s management is hopeful that the solar investment tax credit will be extended, and is planning to capture some of that upside. But they also talked at length about pushing for increased support for manufacturing incentives in the U.S. 

First Solar is the largest U.S. solar panel manufacturer, so it has an incentive here, but there is a bill called the Solar Energy Manufacturing for America Act that has passed the House of Representatives and is in the Senate right now that is aimed at helping the industry. The current bill calls for up to $0.11 per watt in tax credits per solar module, which compares to First Solar’s sale price of $0.27 per watt in the first quarter. Investors shouldn’t price in this credit, but if it happens there could be a massive boost for First Solar.  

What to think about First Solar’s latest report

There’s clearly a lot of demand for First Solar’s modules right now. And with two new manufacturing plants being built that will double production, there could be significant capacity growth ahead. 

I also like that First Solar is pushing its own technology forward with high-efficiency solar panels. These may not all reach mass production, but it’s the kind of push investors should like to see. 

Long-term, this is a solar stock I think will do well, although the ride will be rocky. But given the recent sell-off, this could be a great buying opportunity if you’re willing to hold until First Solar’s growth really kicks in. 

Travis Hoium has positions in First Solar and SunPower. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.

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