Shares of First Solar (NASDAQ: FSLR ) are being pummeled today after it reported weak revenue in the fourth quarter. The company that once dominated solar with low-cost modules must now ask serious questions about its future. What happens to the module business going forward? Can First Solar survive with just a systems business? Will First Solar become an MLP, REIT, or other financial structure?
Below I've highlighted what I think First Solar needs to do to survive, some of which the company is already implementing.
Thin film modules are a dead end
First Solar built its business on the back of cadmium telluride solar panels, which for a long time cost less than silicon panels and were more reliable than emerging CIGS and amorphous silicon technologies. Today, the landscape has changed and First Solar no longer has a wide lead over competitors in cost per watt. More importantly, if First Solar doesn't have a lead in cost per watt, then its lower efficiency becomes a major liability.
Chinese manufacturer Trina Solar (NYSE: TSL ) reported blended module average sale price of $0.64 per watt in the fourth quarter, lower than the $0.68 per watt each First Solar panel cost. Trina makes panels that are 14.7%-16.4% efficient, which easily exceeds the 12.9% efficiency First Solar has achieved. Even when you factor in the low-light advantages of First Solar panels, it's still better to go with higher efficiency.
U.S. competitor SunPower (NASDAQ: SPWR ) has taken it a step further and made panels that are 21% efficient, in a wholly different ballpark from First Solar. In residential and commercial markets, where space is at a premium and balance of system costs are higher, its efficiency wins out over First Solar every time. That's First Solar's challenge today, but it only looks worse for the future.
GT Advanced Technologies (NASDAQ: GTAT ) is launching cell technology later this year that will bring cell efficiencies from 17%-19% up to a range of 22%-24%. That will leave thin film in the dust.
First Solar needs to transition away from being a module manufacturer to a systems business that buys modules from others. The thin-film business is simply on the wrong side of the industry; it'll drag First Solar down if it is allowed to.
Purge the balance sheet
What First Solar has over almost everyone else in the solar industry is a strong balance sheet. It has over $1 billion in cash, $2.8 billion in current assets (cash, accounts receivable, inventory, etc.), and just $500 million in long-term debt. Cash increased nearly $300 million over the past year -- I think First Solar needs to keep doing this to remain relevant.
One thing to watch will be property, plant, and equipment assets, which were down $291 million over the past year. These items are things like manufacturing facilities, which don't hold much value. If First Solar can turn some of these assets into cash, then the money can be used for other things.
With backlog falling it also will be important to turn project assets into cash. The company has $401 million of unbilled accounts receivable and $359 million of project assets, both of which should turn into cash.
If First Solar grows its cash, then what will this do? It gives the company flexibility in its next phase. It could choose to buy a manufacturer with higher efficiency, build projects and own them (which I'll cover next), or even return money to shareholders if the stock continues to fall. Purging itself of unproductive assets like manufacturing facilities simply gives flexibility, something First Solar will need in the future.
Transition to a systems business
First Solar has been making a long transition to a systems business but I think the next step is to begin using competitors modules, get into commercial and residential, and transition to a new financial structure.
First, the company has proven the ability to build massive projects with cost effectiveness, and it could do this at an even better price with higher efficiency modules. This may mean buying them from competitors or partnering with a competitor somehow. Either way, First Solar needs to begin a transition away from its thin-film technology to more efficient technology sooner rather than later.
Second, the utility business has driven First Solar, but in many places commercial and residential is the future. Think about Southern California, Japan, Hawaii, and the Caribbean as areas where power is expensive and space is at a premium. First Solar has little to no exposure in these areas and this is a big part of the future.
SunPower and SolarCity (NASDAQ: SCTY ) are currently growing rapidly in the residential space, lowering costs and leveraging growing financing for this space. SolarCity can get competitive pricing from a variety of module makers to keep prices low, something First Solar could mimic. First Solar has the brand name to become a major residential and commercial installer; it's time for it to stop ignoring that market.
Finally, I think the U.S. government will soon open up financial structures that will be advantageous to First Solar. Solar MLPs have been mentioned by Congress and REITs are a possibility as well. If First Solar has the balance sheet to build and own its own projects, it could easily take advantage of these structures and launch an IPO in an MLP or REIT structure when it is allowed. That way First Solar could take leverage its cost advantages and scale to bundle solar projects together and sell them to investors with leverage provided by debt. This is where I think the future lies for First Solar, but to get there it has to get over being a thin-film manufacturer and set up the balance sheet to leverage projects.
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