First Solar: Leading With Innovation While Structural Obstacles And Competition Remain

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Investment Thesis

First Solar (NASDAQ:FSLR) has awesome technological and manufacturing capacity to support its mean word description , and is good positioned to seizure nan expanding request successful star powerfulness from nan US and abroad. However, a lot of nan explosive maturation look to person been priced successful its value while increasing maturity and heating title could thrust down nan spot prices for nan agelong term. The institution could usage nan macro tailwind to amended its financials and proceed striving for further invention and growth.

Company Overview

First Solar is an American star exertion institution and world supplier of PV ("photovoltaic") star power solutions, pinch R&D labs successful California and Ohio. The institution manufacture and waste PV star modules pinch an precocious deliberation movie semiconductor exertion that supply a high-performance, lower-carbon replacement to accepted crystalline silicon PV star modules. It besides committed to reducing nan biology impacts and enhancing social/economic benefits from earthy worldly sourcing to end-of-life module recycling. It is nan largest bladed movie PV star module shaper successful nan world and nan largest PV star module shaper successful nan Western Hemisphere.

Strength

First Solar's spot and advantage mostly dishonesty successful its technological innovation, manufacturing process and continuous investigation and development. The institution has a module semiconductor building of a single-junction polycrystalline bladed movie that good matches to nan star spectrum. It delivers competitory wattage that utilizing only 2% of nan semiconductor worldly utilized successful accepted crystalline silicon modules. Advanced module exertion is basal to First Solar's business strategy, and producing nan modules efficiently is cardinal to its profitability astatine ample scale. It has a precocious through-put manufacturing situation that automates each steps into a continuous travel line. It gave an example: a expanse of solid enters nan accumulation statement and tin beryllium transformed into a completed module fresh for shipment successful a fewer hours. Then erstwhile it comes to nan value power and reliability assurance program, it conducts acceptance testing for electrical leakage, ocular quality, and powerfulness measurement to meet manufacture and soul standards earlier merchandise shipment. In different words, nan company's business occurrence and competitiveness profoundly trust connected its technological advancement and manufacturing implementation. It's not astonishing nan institution continues to fortify its lead connected this beforehand pinch description . It expected its nameplate manufacturing capacity to beryllium doubled by 2026 comparing to nan extremity of 2022.

First Solar Manufacturing and R&D Expansion (Company Q3 2022 Presentation)

If we respect nan preamble of Inflation Reduction Act successful May past twelvemonth was opening up a caller era successful nan greenish tech industry, possibly we tin respect nan past capacity of First Solar arsenic pre-IRA. During its pre-IRA period, nan company's gross was volatile connected a quarterly basis, but unchangeable arsenic it stays wrong a range. Both gross and gross profit picked up successful nan latest quarters from a gaffe successful early 2022, albeit are still astatine their little level historically. According to nan company, nan debased gross profit has to do pinch under-utilization losses of $10-15 cardinal and a bequest systems business plus Luz del Norte task successful Chile that produced $45-50 cardinal losses. Reviewing complete 15 years' of information shows its gross profit has a flimsy downward trend, but higher gross mostly associated pinch higher gross profit. It intends standard is captious to nan company's bottommost line, some successful accumulation and sales. It echoes backmost to what we conscionable alluded to that nan company's accent connected expanding manufacturing astatine scale.

First Solar Quarterly Revenue vs Gross Profit (Calculated and Charted by Waterside Insight pinch information from nan company)

If we only look astatine nan past 10 years, its nett income successful dollar word really person travel down. What could beryllium nan causes?

First Solar Past Ten Years Net Sales (Charted by Waterside Insight pinch information from nan company)

The company's expected module shipment by Q3 was 14.3 GW, 30% little than nan afloat twelvemonth shipment of 2022, while compensated by 43.7 GW net-bookings by Sep 30, 2022. They bring nan full expected module shipments beyond that day to 58.1 GW. So nan little nett income were not from nan income of modules, which is nan biggest conception of its income and revenue.

FSLR (Company Q3 2022 Presentation)

Looking astatine its gross by class by Q3 2022, we tin spot its module conception though somewhat little YoY, it wasn't thing substantial. The biggest driblet came from its star powerfulness system, which is portion of its powerfulness strategy business. It went from $311 cardinal successful Q3 2021 to only $2.4 cardinal successful Q3 2022. Its powerfulness strategy business has components of task development, EPC (Engineering, Procurement, and Construction)services and Q&M (Operations and maintenance) services. This accounted for astir 15.4% nonaccomplishment of nett income from Q3 2021's figure.

First Solar Revenue by Segments (Charted by Waterside Insight pinch information from nan company)

In position of prices, nan star manufacture has matured accelerated successful nan past 10 years and nan prices person been heading downward arsenic a agelong word secular trend.

Cost of Rooftop Solar for Typical Residential Home (Company Q3 2022 Presentation)

So nan alteration successful nett income complete nan past 10 years could beryllium attributed to nan agelong word inclination of little spot prices, while nan caller autumn could beryllium owed to immoderate bottleneck causing powerfulness strategy improvement delay, successful summation to nan higher logistics costs unit nan institution cited successful its net call. In nan meantime, its income measurement of modules arsenic its main conception remains robust.

On nan costs front, nan institution person some operating expenses and costs of gross nether control. They are astatine their mean level without immoderate ample increase. As a greenish power generator manufacturer, nan sustainability successful First Solar's accumulation and operational process is particularly important to nan business viability. The institution is nan only PV star module shaper pinch world in-house recycling capabilities. So aft factoring this into its costs and expenses, it shows nan institution is doing a bully occupation successful this regard. Going forward, it is important to see, pinch nan ample description it planned connected having, really will costs and expenses germinate successful nan upcoming quarters and years.

First Solar Cost of Revenue vs Operating Expenses (Calculated and Charted by Waterside Insight pinch information from nan company)

Closely related to operating expenses, its R&D expenses arsenic a percent of nan operating expenses person travel backmost down to mean level aft reaching a highest successful precocious 2021 early 2022. Given nan comparatively level operating expenses, this change mostly reflected nan different spending level for R&D alone. For First Solar, nan R&D spending is really a nonstop contributor to nan costs reduction. It cited its R&D model's vertical integration, from precocious investigation to merchandise development, manufacturing, and application, arsenic its advantage complete competitors. It intends higher R&D spending should bring down early operating expenses arsenic it intends astatine expanding wattage gains pinch little cost. The existent level seems reasonable for what its extremity is.

First Solar R&D Expenses vs Operating Expenses (Calculated and Charted by Waterside Insight pinch information from nan company)

The company's operating rate travel has been improving arsenic good arsenic its free rate flow.

First Solar Free Cash Flow vs Operating Cash Flow (Calculated and Charted by Waterside Insight pinch information from nan company)

And its liquidity position is still successful bully style to support adjacent word description .

First Solar Quarterly Current Ratio (Calculated and Charted by Waterside Insight pinch information from nan company)

Overall, we find First Solar successful a beardown maturation position pinch title and headwinds remain. The institution has awesome momentum moving guardant successful some improvement scheme and manufacturing description .

Weakness/Risks

As nan star manufacture matures, nan title has inevitably thrust down profit margin. We tin spot nan profitability of First Solar has turned little arsenic a agelong word trend. Although EBITDA separator is still astatine historical average, gross profit separator has turned to almost its lowest.

First Solar Margin Analysis (Calculated and Charted by Waterside Insight pinch information from nan company)

Net income has turned from $337 cardinal summation successful 2021 into a mini losses of $37 cardinal successful 2022, mostly owed to little nett income while operating expenses stayed astatine akin level.

First Solar Quarterly Net Income (Calculated and Charted by Waterside Insight pinch information from nan company)

The company's inventory accrued successful absolute term, though connected a comparative to gross ground has travel down aft nan past quarter's betterment of revenue. Revenue will request to support connected nan betterment inclination to bring it backmost down to its mean level.

First Solar Inventory Analysis (Calculated and Charted by Waterside Insight pinch information from nan company)

In general, we spot nan expected jump of maturation successful 2023 to beryllium a basal betterment to First Solar alternatively of a adjacent level upgrade. The institution needs to assistance its financials backmost to its mean humanities level earlier taking off.

Big picture: Macro Tailwind, Structural Obstacles, and Competition Co-exist

The Inflation Reduction Act (IRA) will initiate immense caller spending connected cleanable energy, collectively $369 cardinal finance successful nan modernization of nan American power system. The institution expect astir of nan provisions successful IRA to return effect starting successful 2023. This caller activity of finance apt to past for years if not complete a decade successful nan span. For star power, Wood Mackenzie and SEIA forecast astir 27.9 gigawatts of further US star capacity this year, which is simply a large summation YoY pinch estimated 18.6GW successful 2022.

US PV Installation humanities information and forecast 2010-2027 (Wood Mackenzie)

Moreover, removal of nan method obstacle of artillery retention has go reality for galore star powerfulness generators and households, which accrued star power's competitiveness pinch earthy gas. So accrued request mixed pinch factors of higher logistics and commodity cost, nan nationalist mean strategy prices successful nan US person accrued alternatively successful nan past year, according to information compiled by Wood Mackenzie and SEIA.

Modeled US National mean strategy value by marketplace conception (Wood Mackenzie )

Under this backdrop, investors' enthusiasm was ignited and it spurred rallies successful First Solar. However, location are structural obstacles that mightiness origin delays. The US depends connected Asia for astatine slightest 80% of its sheet supply, and nan punishment against China, who supply astir half of nan world's proviso of polysilicon, will origin definite hold successful nan proviso chain. And domestically, location is lengthy hold for support to link projects to existing authorities aliases location powerfulness grids. So it mightiness still return a fewer years for each basal conditions to statement up for a complete return disconnected of nan industry.

Overall, nan title successful nan manufacture continues to power up. Since caller illness of worldly cost, starring Chinese module manufacturers are readying connected ramping up accumulation for nan year. In consequence to nan overseas competition, nan institution positions itself to beryllium a responsible star shaper pinch industry-leading ESG ratings. And its first mill successful India is expected to unfastened successful 2H and its 4th manufacturing installation successful nan US is expected commence operations successful 2025.

Polysilicon and wafer value plummet (Bloomberg NEF)

In nan meantime, caller products, specified arsenic bifacial modules that seizure diffuses irradiance and reflected ray connected nan backmost side, aliases N-type star cells that supply improvements to efficiency, capacity and degradation advantages, are being introduced by its competitors. The R&D efforts by First Solar will determine its early maturation and improvement from this perspective. The institution currently moving on nan operational and marketplace readiness of their next-generation Series 7 modules and CadTel bifacial modules based connected their Series 6 platform. The title continues to power up for nan company.

As nan institution put it successful its 10-K, it sees nan star manufacture to person proviso and request structural imbalance from clip to clip connected nan way towards maturity, which accumulation capacity exceeds world request could put unit connected pricing and adversely impact nan operational results. We work together and judge agelong word investors should besides value that successful for nan valuation, while embracing nan agelong word maturation trajectory of nan manufacture and nan institution arsenic nan instauration has been laid and group up.

Financial Overview

First Solar Financial Overview (Calculated and Charted by Waterside Insight pinch information from nan company)

Valuation

We return into relationship of each nan study supra and usage our proprietary models to measure First Solar's agelong word adjacent worth pinch a 10 years guardant projection. In our bullish case, nan institution has affirmative maturation successful its rate travel for nan adjacent six years, including an explosive upgrade to decisively move nan antagonistic rate travel into precocious affirmative value, and yet its free rate travel reached $4.1 cardinal annually by 2032; it was weighted astatine $167.11. In our bearish case, nan company's maturation has a spotty moderation successful nan adjacent 5 years, and its rate travel hovers astir $3-3.5 cardinal by 2032; it was weighted astatine $138.71. In our guidelines case, First Solar has akin beardown maturation arsenic successful nan bullish lawsuit while pinch immoderate slow down successful nan adjacent 5 year, it rebounds and resumes beardown growth; it was weighted astatine $149.98. Currently, nan value is betwixt our apical estimate and guidelines case.

First Solar Fair Valuation (Calculated and Charted by Waterside Insight pinch information from nan company)

Basically, successful each scenarios we constructed a beardown maturation way for nan adjacent 5 to six years for nan institution without overmuch discount, and only differentiate nan adjacent 5 years aft that owed to maturity of nan manufacture and re-balance of proviso and request dynamics. This implicitly assumes that First Solar will proceed support its lead successful technological invention and manufacturing process.

Conclusion

The little spot value for star modules owed to aggravated title will beryllium made up by higher income measurement and nan unleashed beardown request pursuing nan IRA. First Solar, arsenic nan largest star shaper successful nan US, is successful a bully position to seizure that growth. On nan different hand, nan building obstacles and title could slow down nan adjacent word maturation while imbalance of nan manufacture from clip to clip successful nan agelong word should beryllium expected. We, arsenic galore enthusiastic investors, look guardant to a caller dawn successful nan star manufacture and a robust maturation trajectory for First Solar. But we spot a batch of nan visible early maturation has been immersed into nan existent marketplace price. We urge a clasp astatine this level.

We are data-oriented investors pinch complete 20 years of finance acquisition successful stocks, fixed income, forex, commodities futures, and options pinch success. With our unsocial approach, we supply independent opinions and insights focused connected discovering medium-term finance opportunities. Waterside Insight is simply a wholly-owned subsidiary of RootBanyan Capital Management LLC.