First Solar (FSLR -1.39%), like most solar stocks, has been red-hot this year. Shares of the solar panel maker are up about 32% year to date, which has outpaced the equally scorching hot S&P 500's nearly 30% total return.
With shares of the renewable-energy company soaring this year, investors likely wonder if they're still worth buying. Here's a look at the case for and against buying First Solar's stock these days.
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The bull case for buying First Solar stock
The renewable-energy sector is growing at a brisk pace because of rising climate change concerns and falling costs. Global renewable-energy generating capacity is on track to increase by 1,200 gigawatts (GW) from 2019 to 2024. To put that size into perspective, it's roughly equivalent to the total installed power capacity in the U.S. Solar will account for nearly 60% of that growth, which is great news for solar panel makers like First Solar.
Because of the strong demand for solar panels, the company has already booked enough sales to sell out the current capacity of its new Series 6 module through the middle of 2021, giving the company lots of visibility into its near-term growth prospects. In its view, it should ship 5.4 to 5.6 GW of solar panels this year, generating $3.5 billion to $3.7 billion of revenue. Furthermore, it should earn $2.25 to $2.75 per share, up more than 80% year over year at the midpoint. Those numbers should increase next year since the company will have the capacity to produce 6.7 GW by the end of 2020.
In addition to that visible growth, First Solar has a top-tier balance sheet. It expects to end the year with between $1.7 billion and $1.9 billion in net cash, which is a significant competitive advantage given that most rivals have lots of debt. That gives it the financial flexibility to continue expanding as well as to potentially return cash to investors via a dividend and stock repurchase program.
The bear case for against buying First Solar stock
With First Solar's stock soaring more than 30% this year, it currently trades at around $56 a share. That has the company selling for more than 22 times earnings, assuming it hits the midpoint of its guidance range. That's not exactly a bargain, though it's also not quite as expensive as it was earlier in the year, when shares traded north of $65 apiece. The stock could give back some more gains if the market cools off or it hits a speed bump.
That's exactly what happened in the third quarter as its stock plunged after it posted lackluster third-quarter results. If the company disappoints again in the fourth quarter, by reporting earnings closer to the lower end of its guidance range, the stock could take another tumble.
Another concern with First Solar is what it might do with all its cash. While the company has been using some of it to expand its Series 6 manufacturing capacity, it has more than enough to suit its current needs, and so it faces a dilemma of what to do with its cash war chest. Ideally, it will use some of the funds to start paying a dividend and opportunistically buy back stock. However, there's a risk that it could use its financial firepower in less shareholder-friendly ways, such as making an ill-advised acquisition. If the company blows through its cash by making deals, its shares could languish.
Verdict: First Solar still looks like a good stock to buy
While First Solar isn't as cheap as it was to start the year, it's not trading at an exorbitant price, given the visible growth up ahead. On top of that, it has a pristine balance sheet, which it could use to reward investors through a dividend and share repurchase program. It looks like a great renewable-energy stock to buy for the long haul.
