First Solar (NASDAQ:FSLR, Financial) finds itself at a crossroads with strong financials on one side and political uncertainty on the other side. On Trump's return, renewable energy faced headwinds that included the halted federal solar projects and scrapped EV mandates. The market saw this coming. Despite the stock increasing by 15% year-over-year and an astonishing 233% over the past half-decade, it is down 44% from its June 2024 peak.
First Solar, however, is still a giant in utility-scale solar, and it continues to see rising sales, improving profits, a solid high upside potential, and a clear long-term growth path. What's more appealing is that the stock is undervalued and has a nice combination of profitability and affordability. If investors are willing to ride out the short-term uncertainty, First Solar may make a compelling bet for clean energy in the long run.
Company overview
First Solar is an American thin film photovoltaics (PV) manufacturer and a leader of the solar industry. Unlike other top solar companies, it is unique in the industry as it does not use Chinese supply chains. First Solar has manufacturing facilities in Ohio, India, Malaysia, and Vietnam and plans a global annual capacity of 20 GW by 2025. The company is yet on the track to power its global operations with renewable energy by 2028 and to be at Net Zero by 2050.First Solar delivers strong growth and profitability
The third-quarter of 2024 was impressive for First Solar with net sales rising to $887.7 million compared to $801.1 million in Q3 2023. The revenue for the first nine months is also a whopping $2.69 billion versus $2.16 billion a year ago. First Solar's thin-film modules also have strong demand. Not only that, but renewable energy investment is growing globally and the U.S. policies also continue to support the growth of the industry.Moreover, profitability is a standout. Improved cost efficiency in the form of gross profit was up to $445.3 million from $376.2 million in Q3 2023. Operating income also rose 18% to $322 million and net income increased 16.6% to $313 million. First Solar is making real money, as that's a strong bottom line translating to a basic EPS of $2.92.
As for the balance sheet, First Solar has $1.01 billion in cash, down from $1.95 billion at the start of the year largely due to the large amount of capital investments, which are more than $1.2 billion in new manufacturing capacity. Long-term debt is manageable at $373 million, and total liabilities of $3.84 billion versus a solid $7.59 billion in equity is indicative of financial stability.
Now let's talk about some policy issues and the bigger picture. First Solar also continues to capitalize on the U.S. Inflation Reduction Act (IRA) and wins $659.7 million in tax credits. The government is essentially subsidizing First Solar's dominance in U.S. solar manufacturing, providing it with such a huge cost advantage that it would be foolish for anyone else to compete.
To conclude this financial story, First Solar is executing well on higher sales, strong profits, and smart use of government incentives. The cash burn is notable, but it's putting it back into expansion, which will show rewards in the long-term. If First Solar can maintain its margins and demand stays strong, it will remain king of the solar world for many years to come.
First Solar's soaring growth and strong market position
First Solar's future trajectory is absolutely impressive with revenues and earnings growing quickly. The company has a forecasted EPS of almost $34.32 in 2028 from $13.20 in 2024 which makes the operational execution of the company and the forecasted demand for its solar technology seems strong and high. The number grows steadily, but the deceleration after the 2026 implies that it has switched from hypergrowth to smart growth, or as one would expect for an industry leader that is growing but maturing.Source: Consensus EPS Estimates (Seeking Alpha)
First Solar also has a lot of success to do with it being able to scale efficiently. With revenue rising to $4.23 billion to $7.56 billion, the earnings are likely to grow even faster. It is suggested as an idea of operational leverage where fixed costs are stable and the revenue is increased, and as a result the stock is profitable.
Source: Consensus Revenuee Estimates (Seeking Alpha)
And finally the forward P/E and P/S ratios are shrinking further. Long-term investors will have even more to like about First Solar's valuation if earnings keep marching on its projected path.
First Solar's valuation signals a hidden opportunity
Source: Author Generated Based on Historical Data
Reading First Solar's valuation metrics will tell a story of potential that is certainly under the radar. First of all, its P/E GAAP (TTM) is an admirable 14.43 times, corresponding to a hefty 53% discount to the sector median of 31. Even more impressive, the forward P/E drops to 12.69 times, nearly 58% below the sector. This suggests that First Solar's earnings power and future prospects are being undervalued.
The reward here, however, is a jaw-dropping PEG ratio (GAAP) of 0.09 times, compared to a sector median of 1.22. That means that not only is First Solar undervalued, but its growth is on sale at a bargain, which makes it a rare play for a company with such strong growth potential.
While the EV/sales metric comes in slightly above the sector average, a 48.8% discount to EV/EBITDA (TTM) of 10.11 times indicates how undervalued this stock is. First Solar is worth a closer look for an attractive fundamental clean energy play.
A stronger case against peers
First Solar provides a much more compelling opportunity when compared to its peers Skyworks (NASDAQ:SWKS) Solutions (SWKS, Financial) and GlobalFoundries (NASDAQ:GFS, Financial), which appear overvalued by several metrics. FSLR's P/E GAAP (TTM) is much lower than SWKS at 24.05 times and GFS at 31.42 times. This is even evident in First Solar's forward P/E, which is much lower than SWKS at 25.48 times and GFS at 34.55 times, showing how First Solar's valuation is exceptionally attractive on an earnings basis.The growth-adjusted PEG ratio adds to this case for FSLR, coming in at a very low 0.39 times today compared to SWKS at 1.80 times and GFS at 7.49 times. This metric reveals First Solar is a company with great growth potential at a much more reasonable price. Also, FSLR's EV/EBITDA (TTM) of 10.11 times is more appealing than SWKS's 13.12 times and comparable to GFS's 9.17 times, which indicates high profitability at a lower valuation.
Source: Author Generated Based on Historical Data
Taken together, First Solar's metrics reveal that the company is undervalued compared to its peers and features a rare combination of growth, profitability, and cheap valuation.
Realistic price target with substantial upside
The valuation metrics and price forecasts of First Solar can be used to establish a reasonable 12-month price target based on the valuation, peer comparison, and growth potential of the company. The average price target from analysts of $270.02 represents a solid 61.19% upside and the GF Value of $301.74 implies an even more ambitious 80.12% potential gain.However, now in order to be conservative when taking into account strong fundamentals, market volatility, and peer valuation, a reasonable price target would dwell below the GF Value. With that said, I assign First Solar a price target of $250-$270 over the next 12 months, given that it sits somewhere between growth potential and valuation though grounded in financial and sector trends.
Risks to my thesis
First Solar has a strong investment thesis, yet a number of risks can undermine the growth and valuation potential.The first is political and policy uncertainty. This reliance on government incentives like the U.S. Inflation Reduction Act (IRA) makes it all quite vulnerable to political leadership changes, and if there is a change, tax credits or subsidies could be cut.
There are also supply chain and manufacturing problems. New manufacturing production capacity is well invested in by First Solar, but the global supply chains could increase costs or delay production. First Solar's thin film technology is also strong, but other solar innovations may be able to compete with it and hence reduce its market share in the utility-scale solar sector.
In addition, the earnings misses are an additional risk to the stock price given the last quarter's performance. If the company misses again on earnings expectations, the stock will be under heavy downward pressure.
Your takeaway
Overall, First Solar is a good investment in the clean energy industry because of its strong growth and profitability, as well as its advanced thin film technology and large manufacturing expansion. The company's financials are solid, and the valuation is quite attractive for the peer group.While there are risks that should be thought about, there is no investment without risks, is there? Nonetheless, First Solar's strategic position and government incentives give it a strong position in the solar industry. If the company can maintain its margins and challenges, it can hold on to its lead in renewable energy charges. The company is thriving in a fast-growing sector and has reasonable price targets in the next 12 months.
So, who would want to miss out on such a great opportunity to double down on growth?
This content was originally published on Gurufocus.com
