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First Solar: Compelling Buying Opportunity Despite Widespread Macro Headwinds

Summary

Solar modules have fallen into global overcapacity since 1Q FY16, causing ASPs and unit volume pressure.

Despite cyclical concerns, solar remains a long term growth industry as the broader cost per watt curve improves.

First Solar remains a stand-out among peers given reliable cash flow streams and a strong balance sheet.

The business moat remains narrow, however it should improve given record R&D spend and expected technological improvements.

Current valuation has this premium business selling for 10x ex-cash earnings.

In early to mid-2016, investors were given warnings about overcapacity taking hold in the solar industry, whether it was residential or commercial target markets. As such, overproduction from these companies has begun to cause immense downward pressure on businesses. Moreover, lower energy costs across a multitude of petroleum products has lessened aggregate demand to an extent given that the solar cost curve still has a long way to go before it becomes reasonably competitive. Regarding First Solar (NASDAQ:FSLR) specifically, it remains apparent that it will be difficult selling off their Series 4 module inventory. It is somewhat unclear as to what actions management will have to take in order to work through this issue, but it certainly means temporary trouble.

The Product

For context, solar energy conversion efficiency is undeniably the most important factor for overall demand of these products, other than the fact that it is environmentally friendly. As mentioned in the latest conference call, management stated that their average energy conversion is roughly 16.5%. The absolute theoretical cap for solar energy is about 30%, also known as the Shockley-Quisser limit. Here is a visualization for where First Solar stands among the competition:

Image sourced from comfysolar.com

As you can tell this information is modestly dated, as First Solar is now approaching a 17% efficiency, especially when considering their new Series 5. You will also notice that First Solar appears to be on the lower end of the curve, but the interest part is that they are one of the few they can actually sell their product for a profit. Moreover, it doesn't take much of an...


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