First Solar (FSLR +2.65%) is one of the most valuable solar companies in the world, but it faces a highly competitive industry and uncertain future as it upgrades manufacturing capacity.
To get an idea of what First Solar might be worth, I've laid out what capacity plans look like and where margins may end up with its new product. Here's a look at how First Solar could sink or swim as an investment over the next few years.
Image source: First Solar.
Series 6 is the future
First Solar is in the process of upgrading its equipment to a new product called Series 6. It's the combination of a larger form factor and slightly higher efficiency than the current Series 4 product. But the intention is to combine the panels with racking, inverters, and even energy storage to provide a complete solution to solar developers.
The big strategy change is that First Solar will be selling these components to other developers rather than developing projects itself. This will likely mean lower sales per watt but more stable margins than the ups and downs of the project development business.
Right now, First Solar says it will have a little over 3 GW of Series 6 capacity in 2019, with the potential to add more in the future. That's where we'll start our projection of what First Solar's financials might look like.
How much money can First Solar make?
If First Solar is supplying components to utility-scale solar developers, we can ballpark how much money it could make. Management has already discussed the cost of building solar power plants falling below $1 per watt, so let's assume sales per watt are $0.75, which is the same approximation I used in valuing competitor SunPower.
From those sales, First Solar will generate a gross margin that needs to cover operating expenses of around $330 million to make a profit. Here's what gross margins could look like.
| Metric | Low-Margin Scenario | Medium-Margin Scenario | High-Margin Scenario |
| Production | 3.0 GW | 3.0 GW | 3.0 GW |
| Sales per watt | $0.75 | $0.75 | $0.75 |
| Gross margin | 15% | 20% | 25% |
| Total gross margin | $337.5 million | $450 million | $562.5 million |
Table by the author.
You can see that the best-case scenario is First Solar making about $232.5 million in operating profit if it can generate a 25% gross margin. That's a high projection given the competitive nature of the utility-scale solar business. In a worst-case scenario, First Solar would barely break even operationally.
What could change the game is if production jumped to 5.0 GW or more. The table below shows gross margin under a scenario where sales per watt are $0.75 and gross margin is 20%. This would imply that First Solar is very competitive and sees a growing opportunity to take market share in solar.
| Metric | Existing Production | Medium Growth | High Growth |
| Production | 3.0 GW | 5.0 GW | 7.0 GW |
| Total gross margin | $450 million | $750 million | $1.05 billion |
Table by the author.
You can see that production plans arguably have more of an impact on financials than gross margin. If First Solar expanded production to 7.0 GW, it could make $720 million in operating profit.
Don't forget about the balance sheet
Right now, First Solar expects $1.5 billion to $1.7 billion of net cash on the balance sheet at the end of 2017 after spending $525 million to $625 million on capital expenditures. By the end of 2018, the cash level will likely be lower because total Series 6 upgrade will cost around $1 billion. Let's assume that by the end of 2018, the cash balance has fallen to $1 billion because of upgrade costs and lower overall cash flow because equipment is being upgraded.
That's still a better balance sheet than most solar companies, but it means the stock is pricing in a $3.0 billion net market value of the company.
What is First Solar really worth?
If First Solar doesn't increase capacity and generate margins higher than 15%, it'll have a tough time justifying its current valuation. But if it opens up expansion plans and Series 6 proves to be another high-margin product, we could see a sharp rise in the stock. If we assume all of the $720 million in operating profit I laid out in the high-growth scenario above flows to the bottom line, and the stock trades with a 10 times earnings multiple, plus we add in the $1 billion in cash, the company could be worth about $8 billion in 2020. That's double where it trades today.
What's unknown is whether First Solar's Series 6 strategy will work out as planned. We already know that SunPower is following a similar strategy and will have a higher-efficiency product by the end of 2017 than First Solar hopes to launch in 2019. If silicon-based cells keep falling in cost, it could be tough to compete.
First Solar isn't the safe bet it may appear to be in solar. And the future of the company is riding on the upgrades currently being put into manufacturing plants today.
