First Solar (NASDAQ: FSLR.OQ) Devil’s Advocate Summary

By Ratul Banerjee and Ananya Kumar

Overview 

First Solar, Inc. is a provider of photovoltaic (PV) solar energy solutions. The Company designs, manufactures and sells PV solar modules with a thin-film semiconductor technology. The Company also develops, designs, constructs and sells PV solar power systems that primarily use the modules it manufactures. It operates through two segments: components and systems. The components segment is engaged in the design, manufacture and sale of cadmium telluride (CdTe) solar modules, which convert sunlight into electricity. The systems segment includes the development, construction, operation and maintenance of PV solar power systems, which primarily use its solar modules. In addition, the Company provides operations and maintenance (O&M) services to system owners that use solar modules manufactured by it or by third-party manufacturers. The Company’s solar modules had an average rated power per module of approximately 114 watts, as of December 31, 2016 (Editorial, 2020). (First Solar Summary 23rd October 2020)  

Analysis  

First Solar  2016  2017  2018  2019  Current  
Price/Sales  1.19  1.66  2.50  2.46  2.80  
Price/Earnings  6.06  0.00  7.86  78.19  88.87  
Price/Book  0.85  0.90  1.09  1.20  1.68  
Debt/Equity  0.32  0.29  0.36  0.41  0.35  

The price/sales has shown a consistent upwards trend since 2016, suggesting First Solar stock is overvalued. A similar trend can be observed in the price/earnings data, with significant overvaluation from 2018 onwards.  This is acknowledged by the authors of the original report as well, and is a sign against buying First Solar shares. The authors make the argument that First Solar is still worth investing in, as the overvaluation of their stock is small compared to that of its competitors. However, it is difficult to make comparisons between companies, as even within the solar energy industry there is a high degree of variation in products and services. Furthermore, with the onset of the pandemic, it is possible that the slowdown in demand will drive share prices down, making a case at least for not buying, if not selling.  

First Solar’s price/book ratio has been increasing for the past few years and currently stands at a value above 1, which is a sign against a solid investment. The debt/equity ratio has also been increasing, indicating that debt is taking up a larger proportion of First Solar’s growth.  

First Solar’s gross profit margin is at around 25.25% and the sector median grade is at around 47.33% with a sector relative grade score of D given to the company. Return on Common Equity stands at 4.22% for the firm but at 5.58% for the sector. The company’s EV/EBITDA (TTM) is at 10.47 and the sector’s ratio is at 16.72, their P/B ratio is at 1.64 and the sector’s ratio at 4.48.  

The company also faces strong competition from SolarCity, Sungevity, OneRoof energy etc. With some of its peers having 2-3x the revenue of FirstSolar. 

Conclusion  

Recommendation – Hold 

Owners of First Solar shares should hold, while it is recommended that others do not buy or sell as market conditions are quite volatile and the situation is difficult to predict. First Solar’s cash balance is falling significantly, which may result in a fall in stock prices.  

There are also external factors to consider. For instance, the solar Investment Tax Credit (ITC) step down starts this year, which has been a key driver for solar growth in the US renewable energy market (Deloitte, 2019). The US government has also expanded tariffs on Chinese imports important for production in the solar industry. Both factors could slow growth in the sector as costs rise, making a case against buying. Should pandemic restrictions ease and demand recover, the solar industry might be slower to recover compared to other renewables. In particular, the wind industry may experience faster growth if market conditions improve. Therefore, it might be wiser to consider alternative renewable industries to invest in.  

Industry Jargon 

Industry Jargon  

  • Debt/Equity ratio – The debt to equity ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It is used to evaluate a company’s financial leverage (i.e. how much of the firm is growing by using its own equity rather than borrowed funds)  
  • Price/Earnings Ratio – The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share. A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.  
  • Price/Book Ratio  – The price-to-book ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. P/B ratio is used by value investors to identify potential investments. P/B ratios under 1 are typically considered solid investments. 

References 

Get in touch Marlene Motyka US and Global Renewable Energy Leader” mmotyka@deloitte.com. “2020 Renewable Energy Industry Outlook.” Deloitte United States, 8 July 2020, www2.deloitte.com/us/en/pages/energy-and-resources/articles/renewable-energy-outlook.html.  

“Investors.” First Solar, Inc. – Investors, investor.firstsolar.com/home/default.aspx. 


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