First Solar's Outlook Uncertain Despite Recent Stock Rally

First Solar's ( FSLR ) stock saw some very enthusiastic buying earlier this week as its shares jumped nearly 15% from $140 at the close of trading last Friday to almost $160 on Monday. A similar trend was witnessed in the prices of almost all its competitors in the solar industry, which includes SunPower ( SPWRA ), Suntech Power ( STP ) and Yingli Green Energy Holding Com ( YGE ).

Our price estimate for First Solar's stock is at $155 , which in line with its current market price.

First Solar has demonstrated its strength in the past…

First Solar is engaged in the manufacturing and sale of solar modules with an advanced thin film semiconductor technology. The firm also designs, constructs and sells photovoltaic (PV) solar power systems to customers around the world and was the biggest producer of PV modules in 2008 and 2009 with annual sales of about 1.1 gigawatt ( GW ) in each of those years. Although its sales figure increased by almost 30% to reach 1.4 GW in 2010, it is currently ranked second in the world in PV module production and was passed by the China-based solar industry giant Suntech Power to the top spot.

First Solar's competitive strength in the solar industry has been its ability to manufacture PV systems at costs lower than any other company. The first company to reduce per watt manufacturing costs to below $1, First Solar currently builds systems at around 75¢ per watt and would likely reach costs below 60¢ per watt by 2014. This single factor would ensure profitability for the company in the years to come, as revenue per watt sold is continuously being driven down given the extremely competitive environment.

… and there are opportunities that seem to have come up…

In the wake of the nuclear disaster in Japan, investors and authorities are taking a harder look at renewable sources of energy.

To add to that, the fact that Japan is responsible for about 10% of all solar components manufactured worldwide which would be severely affected due to the crisis - at least in the short run - plays in favor of solar industry players like First Solar.

… but there are growing concerns about its performance in the future

One of the biggest concern for First Solar is the fact that most of its sales contracts for the year 2011 are based on selling prices which can be revised every quarter. With prices expected to reduce rapidly in the years to come, this leaves First Solar's revenues unhedged. Moreover, the predicted fall in demand for solar components in Italy, which accounted for 6% of the company's revenues in 2009, is another source of concern.

The sale of 38% of his holdings in First Solar by the company's non-executive chairman of the board, Michael Ahearn, also cast a shadow of doubt in investors' mind about the company's returns in the years to come.

We can understand the impact of a reduction in sales for First Solar on its share price using the estimated shipments to its customers outside the U.S. and Germany. We forecast that First Solar would ship more than 5,000 megawatt (MW) to its international customers through our forecast period. However, if this number were to reduce to 4,000 MW, it would result in a proportional 20% fall in our estimated value of the company's shares. Such a scenario would leave the share price at $125 from our current estimate of $155.

See our full analysis and $155 price estimate for First Solar

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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