First Solar (FSLR 2.12%) is undoubtedly one of the leaders in solar-panel manufacturing. The company's thin-film solar panels now have a cost and efficiency lead over many commodity competitors, and U.S. manufacturing that was once a hinderance to the business is now an advantage due to subsidies.
The company's growth plans have also increased dramatically in recent years, both domestically and abroad. The question for investors is whether that growth is worth the price First Solar's stock currently trades at.
Image source: Getty Images.
Growth is the story for First Solar
After years of being relatively stagnant in manufacturing, First Solar has increased its manufacturing-growth plans. The company expects to sell 11.8 gigawatts (GW) to 12.3 GW of solar panels this year; new plants in India, Alabama, and Louisiana will increase capacity to about 25 GW in 2026.
And there's a lot of demand for those solar panels. As of July 27, the company had 77.9 GW of expected module-volume solar in backlog.
Growth isn't coming at the expense of prices either. Management recently said that the 2024 average sale price for solar panels is 28.6 cents per watt, and that will increase to 30 cents per watt in 2025 and 2026.
Technology improvements will make First Solar a giant
There are small, but meaningful improvements in technology coming down the line. Bifacial solar panels can increase efficiency by 15% in the short term with a roadmap to 35% improvement.
There are also incremental cost reductions of 1% to 2% expected as the company scales manufacturing through 2026.
Margins are a cut above
First Solar's margins are also industry-leading, with 2023 gross margin expected to be 36% at the midpoint of company projections. This is assisted by U.S. subsidies that have made solar more cost-effective domestically, but it's driving First Solar's business right now.
When it comes to technology, growth, and profitability, First Solar is an industry leader. The challenge is knowing what to pay for the stock right now.
First Solar is priced for perfection
You can see below that First Solar's revenue hasn't grown much in the past decade partly because the company turned its focus from developing solar projects to being a manufacturing specialist. That should help margins over time but it puts the company at the whim of third-party developers.
Net income also hasn't been particularly strong as the company ramps up production. As I mentioned above, that should change as new plants come online, and investors are projecting what profitability will look like.
And that's where I come to the price-to-sales multiple, which is a lofty 5.4 times. That's expensive for a manufacturing company in a highly competitive market.
Data source: YCharts.
First Solar is a leader in solar, and there's a clear path to growth and improved profitability. But the run-up in the stock over the past year means a lot of that upside is already priced into the stock.
For now, I think First Solar is a great stock to hold, but I'm not a buyer until the valuation gets better. History tells us that buying solar stocks at high multiples is a recipe for disaster. Eventually, there will be an opportunity to get in at a better price.
