After doubling, First Solar can continue to shine

In what was a good year for the solar industryFirst Solar, Inc. (NASDAQ:FSLR) is the most radiant artist.

Shares of the Arizona-based company have doubled since July 2022 and are up more than 70% this year. They are trading at the highest level in over a decade and are on track to surpass the 2020 return of 77%.

This may just be the beginning of a multi-year run.

First Solar charges amid increased focus on alternative energy sources. With gasoline and natural gas prices high and volatile, more households and businesses are turning to the discounted (and often more stable) solar option.

As a result, a period of shrinking sales is being replaced by growth rates that capture the attention of investors. Wall Street is forecasting 28% revenue growth and a return to profitability in fiscal 2023. With this kind of growth difficult to achieve lately, the outlook is bright for First Solar shareholders.

What is First Solar’s business model?

First Solar is the planet-friendly version of the traditional utility. It makes semiconductor photovoltaic (PV) modules that convert sunlight into electricity. The secret sauce here is a proprietary thin-film technology composed of cadmium telluride material.

Although a US-based company, a large portion of First Solar’s revenue comes from Europe, Japan and India, where favorable renewable energy policies are embraced. It is here where renewable energy project managers and system integrators buy the solar modules to generate clean energy. This main commercial segment accounts for approximately 80% of sales.

The rest of the revenue comes from the residential side of the business and various operations and maintenance (O&M) services. Combined, this ‘Other’ segment generates relatively stable revenue streams that offset the cyclical sales of modules.

Does First Solar have good growth prospects?

According to the International Energy Agency (IEA), solar photovoltaic generation increased 22% last year as utilities, industrial companies and homes pushed global capacity to record levels. Generation will need to grow 25% annually for the rest of the decade to keep up with the agency’s Net Zero Emissions by 2050 target.

First Solar is well positioned to take advantage of this generational shift, as its technology can generate more energy per module than competitors in various markets. This results in savings for customers and a cost advantage for First Solar. Now on its seventh iteration, the technology is distancing itself from coal-fired power plants and gas companies in terms of cost per megawatt.

Unsubsidized solar is expected to show its cost advantage and become a larger part of the global energy mix in the coming years. By 2025, the company expects installed PV capacity to double from 2020 levels.

First Solar’s key ‘bookings’ metric is growing at a good pace. Through the end of the third quarter, bookings were a record 43.7 GWdc (Gigawatt DC) with projects through 2027. This shows that customers are queuing up to deploy solar modules well into the future. When a company’s end markets see such an expanded opportunity, it bodes well for its long-term growth prospects.

With production capacity increasing and a new R&D facility under construction, management is anticipating high demand in the future. The company’s current estimate for total booking capabilities is more than double its current backlog. And given the Biden administration’s clean energy efforts, it’s not surprising that most of the opportunities lie in North America.

Will First Solar Stock Continue to Rise?

Shares of First Solar have risen markedly higher in each of the last four months and are at it again this month. However, with few winning areas outside the energy sector this year trading may get a little crowded.

With this said, there is no reason why First Solar can’t continue to rise higher after a potential pullback.

The solar growth story is becoming increasingly difficult to ignore due to global policy momentum and cost-effective innovation. First Solar’s thin-film technology and fast, sustainable manufacturing process provide an edge that should make it a leading player in clean energy for years to come. Yes, there will likely be legal and other hurdles along the way, but they can be overcome again.

Solar stocks have commanded high valuations for a long time, but are starting to live up to them. In the wake of the pandemic and now the conflict between Russia and Ukraine, the importance of securing a sustainable, clean energy supply has never been clearer.

On average, First Solar has traded about 65x earnings over the past five years. Based on the consensus estimate of next year’s earnings, it has a 47x forward P/E. If the multiple expands back to the historical average, the stock would return to the $200 level for the first time since 2009.

First Solar is an attractive, albeit volatile, way to invest in the decades-long transition to clean energy. Given the momentum in the stock (and limited bear market options), the $200s seem inevitable. In a few years, it may also not be out of the question to revisit record levels above $300.