Is First Solar Really Falling Behind in Solar?

First Solar's stock was downgraded this week, but it might not be the industry laggard that analysts think.

Jan 7, 2014 at 12:52PM

Yesterday, Goldman Sachs downgraded First Solar (NASDAQ:FSLR) to a sell and the stock plunged as a result. Analysts argued that First Solar's position as a builder of utility-scale solar projects will see falling profits and lower growth than companies like SolarCity (NASDAQ:SCTY), which dominates residential solar.

But is this really a dying company, or is First Solar a company to bet on for the long term? Let's take a look at where the company stands.

Is residential solar the future?
Goldman, and the market in general, prefers residential solar to the utility projects that First Solar builds now. SolarCity is a market darling, and with installation growth of up to 90% expected next year the market will remain hot. But does that mean the utility solar market is dead?

Fslr Blythe Project

Workers build the 21 MW Blythe Solar Projects in Blythe, CA. Image courtesy of First Solar.

The fact is that more than 2.5 times as much utility-scale solar was built as residential solar last quarter and utility-scale solar costs 57% less than residential solar. On a cost basis, residential solar isn't competitive with the grid in the U.S. without tax incentives, and utility solar is.

First Solar signed a power purchase agreement to sell solar power in Arizona for 5.7 cents per watt, well below the grid price. SunPower (NASDAQ:SPWR) announced a California project more than a year ago for 10.4 cents per kW-hr and plans to build a 70 MW solar project in Chile that will sell its power straight into the grid, without subsidy. That's where First Solar bought a 1.5 GW pipeline of projects last year; the company no doubt has plans for its own merchant solar projects.

So utility-scale solar is a larger business than residential solar, and it's cheaper to build, but the biggest advantage in my eyes is that First Solar can monetize projects immediately. SolarCity and SunPower, which also finances residential solar installations, want us to believe that these projects will be more profitable on a per-watt basis over 20 years, but there are a lot of unknowns such as panel performance, maintenance costs, and renewal value. First Solar sells projects once they're completed, and we know what the value is immediately. That transparency has to be worth something. 

Will First Solar fall behind?
To answer whether First Solar will fall behind residential solar competitors, you have to consider the future of residential solar. Right now, SolarCity dominates the industry and can generate around $2 per watt of retained value on installations that cost about $3 per watt to build. That's a 40% margin if SolarCity's retained value numbers are true, much higher than homebuilders, finance companies, and appliances or any other product for your home.

One reason margins can be that high is because there are relatively few competitors, and those that exist don't offer the complete package SolarCity does. It can sell a project, install it, and monetize tax credits more efficiently than anyone else. But will that always be true?

I'd argue that over time, residential solar competitors will emerge and consumers will become more educated on the cost of solar and demand more competitive prices. Once the investment tax credit goes down in 2017, there's no reason to think the share of projects installed via leases won't fall significantly from roughly 90% today. In a few years, why not get a loan and own the panels to reap the benefits of solar rather than being locked into a lease for 20 years? SolarCity's own numbers show that system sales come with a roughly 23% margin, well below leases and probably more in line with what I think we'll see long term.  

In other words, even SolarCity's margins will come down over time, something we've already seen happen at First Solar. Residential solar will grow more than utility-scale solar, but it won't always have incredibly high margins and doesn't generate the same immediate value of utility-scale solar. 

First Solar isn't going anywhere
Utility-scale solar is by far the lowest cost solar energy available, and First Solar is the industry leader by a healthy margin. There's no doubt that the company has challenges ahead in improving its technology, but backlog is up 100 MW through the third quarter and First Solar is far more profitable than anyone else in solar.

What's hot today in solar may not last forever. The residential market was on fire a year ago, but it may not be next year as competitors like SunEdison, Sunrun, SunPower, and Clean Power Finance grow in scale and become more competitive.

I'm not suggesting that First Solar is the next solar growth stock or that it won't see margins decline in the future. But the stock trades at 10.6 times trailing earnings and has a long history as a profitable solar company. That's not a position I'd bet against, especially when there are so many questions on the alternatives.

A company disrupting the energy industry
As energy has become more difficult to extract, one company has found a way to pull value by leasing equipment for as much as $41,000 per hour. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers