By Khalid Nazir and Matthew Landon
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 is trading at $85.37 per share as of the close on 23rd October 2020. Over the past year First Solar has seen its share price rise 62.1%, exceeding the industry’s average which returned 46.7% over the past year. First Solar has not only recovered from the financial crash in March as a result of the COVID-19 Pandemic sell off but has surpassed its previous high of $59.32 per share. As firms switch to become more environmentally friendly, such as becoming carbon neutral, the demand for renewable energy has increased substantially, and as such First Solar has benefited. This can be seen through the firm’s earnings over the past year having grown by 321.9%.
The price/earnings ratio (P/E) is a key financial ratio that allows analysts to compare similar firms within the industry to determine whether the firm is over or undervalued. First Solar’s P/E ratio has surged in recent years to almost four times greater than the average NASDAQ stock, which may indicate that the share is overpriced with respect to the company’s earnings at the present time. However, First Solar’s competitors are experiencing similarly high P/E ratios, and this may in fact be an indicator that investors expect high growth rates in the future. Along with First Solar, their competitors SunPower and SolarEdge are set for a rise in earnings in the coming years with P/E ratios 129.69 and 84.19 respectively (Macrotrends, 2020). These figures imply a positive outlook for the industry as organisations across the world make an effort to reduce their negative impact on the environment, while First Solar is in fact not an overpriced stock when comparing it to its competitors.
The price/sales (P/S) ratio for First Solar increased steadily from 2014 before stabilising around 2.5 in the last few years. This is likely due to the fact that the company’s revenues have remained relatively flat over the last two years due to lower module prices (Forbes, 2020). However, its strong balance sheet and differentiated thin-film panel technology are likely to help First Solar to grow as the market continues to expand. This is encapsulated by the current P/S ratio being low relative to its competitors. Notably, the current P/S ratio of SolarEdge of 9.14 is more than triple that of First Solar, confirming that First Solar is an undervalued stock compared to its industry counterparts.
The debt/equity ratio is a key indicator of First Solar’s financial health, indicating how much of the company’s growth is built upon debt. The most recent D/E value of 9.1% is considered satisfactory by the industry standard. First Solar carries a very low amount of debt and as a result has very few liabilities as the majority of its growth has been all organic using the firm’s own revenue and funds. First Solar’s short-term assets ($2.7 billion) are able to cover its short-term liabilities ($747 million) as well as its long-term liabilities ($1.1 billion) which shows that the firm’s financial health has a solid foundation (Simply Wall St, 2020).
Recommendation – Long
COVID-19 has acted as a catalyst for many trends in global markets, and none more so than sustainability. As global firms are looking for ways to become more environmentally friendly, such as reducing their emissions and using renewable energy, in the way it produces goods and services, First Solar is in prime position to benefit from this industry trend. Having seen the largest firms pledge to cut their emission such as Apple and Microsoft, others are likely to follow suit.
Furthermore, while it is never sensible to predict politics, it is undeniable that it is becoming increasingly likely that the Democrats will win the US presidential election on 3rd November. The recent “blue wave” has prompted investors to review the environmental, social and governance (ESG) sector, with a focus on “green” stocks that might benefit from a Joe Biden presidency (Market Watch, 2020). First Solar is certainly one stock that will be considered by investors as the company looks set to reap the rewards of Biden’s plans for a carbon-neutral power-generation sector by 2035 with its industry leading eco-efficient photovoltaic solutions likely to play an essential role in meeting this ambitious deadline.
First Solar’s strong balance sheet and business model should give investors’ confidence that the company will be able to exploit the expansion of the sustainable energy sector in the coming years, which are likely to see the Democrats in office and investing heavily in green energy (Financial Times, 2020). Therefore, with First Solar claiming that its solutions generate more energy at a competitive cost with the smallest environmental impact, this seems to be a great time to take advantage of its undervaluation compared to its competitors.
- Editorial, R., 2020. FSLR.OQ – First Solar, Inc. Profile | Reuters. [online] Reuters.com. Available at: <https://www.reuters.com/companies/FSLR.OQ> [Accessed 24 October 2020].
- Team, T., 2020. Enphase, Solaredge, First Solar: Solar Stocks Poised To Shine. [online] Forbes. Available at: <https://www.forbes.com/sites/greatspeculations/2020/09/07/enphase-solaredge-first-solar-solar-stocks-poised-to-shine/#5aa4c7ff3c22> [Accessed 24 October 2020].
- 2020. [online] Available at: <https://www.marketwatch.com/story/these-green-stocks-would-thrive-under-a-biden-administration-according-to-fund-managers-2020-07-29> [Accessed 24 October 2020].
- Ft.com. 2020. Fund Managers Overhaul Portfolios On ‘Blue Wave’ Bet. [online] Available at: <https://www.ft.com/content/2b630681-e5d9-43ff-a2f1-9910a4509806> [Accessed 24 October 2020].
- 2020. [online] Available at: <http://simplywall.st/stocks/us/semiconductors/na…> [Accessed 24 October 2020].
- 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.
- Balance Sheet – A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time.
- Blue Wave – The anticipation that Biden (Democrat) is likely to win the US Presidential Election.
- Environmental, Social, and Governance (ESG) – a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.