Is First Solar About to Go Into Growth Mode?

The rapid pace of bookings would indicate that First Solar should expand its manufacturing capacity, but that may not be a good idea yet.

Travis Hoium
Travis Hoium
Nov 9, 2017 at 7:31AM
Energy, Materials, and Utilities

First Solar Inc. (NASDAQ:FSLR) is on a hot streak the likes of which the solar industry hasn't seen in a very long time. Not only is its stock up 75% in the past six months, it has booked enough solar panel sales in 2017 to keep its factories busy for the next two years

Given that customers are buying so many thin-film solar panels right now, it would make sense if First Solar announced plans to expand its manufacturing capacity. But it hasn't... yet. Here's what it may take for First Solar to enter production growth mode again. 

Large solar installation in the desert.

Image source: First Solar.

Current bookings may be a windfall

Out of the 6.7 GW of solar panel shipments the company booked this year, 4.5 Gigawatts (GW) came in the third quarter. For perspective, First Solar's max projected production level is a run rate of 4 GW annually by the end of 2019. 

Developers are concerned that President Trump will impose tariffs on foreign solar panels in 2018 -- in particular the silicon-based variety -- making it much more expensive to import them. By going with First Solar's thin-film panels, they're guaranteeing supply for the projects they need to build. 

This current wave of demand could be short-lived, though. If the tariffs are set at a lower level than is feared, or if Trump doesn't impose them at all, silicon-based solar panels could cost less than First Solar's panels. At best, in a low/no tariff environment, First Solar's new Series 6 panels would have to keep pace with the improvements that have been made in silicon-based solar panels

First Solar's best case scenario

If high tariffs are implemented on silicon-based solar panel imports, it would give First Solar a huge advantage in the U.S. market. The company could potentially capture 80%, or more, of a ~10 GW scale U.S. utility-scale solar market, and do so at a high margin. It's already proven it can sell panels at that pace, so it's not out of the question that it would consider a massive manufacturing expansion.

But to commit to that kind of capacity expansion, First Solar would need to be certain that the demand will be there. I expect the company will wait until Trump's final ruling on the trade dispute underlying the tariff question before announcing any capacity expansion because a stiff tariff would guarantee its investment in higher capacity would pay off. If it goes forward with an expansion, it'll take 12 to 18 months to install the required equipment at existing facilities. 

First Solar also needs to be sure that its Series 6 panels perform as well as planned, particularly against improving mono-PERC silicon solar panels. If Series 6 doesn't have a significant competitive advantage, there's no point in building more capacity. 

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Is growth ahead for First Solar? 

Given all of the variables in play, I don't think investors should expect First Solar to announce any major capacity expansions in the near future. If tariffs are imposed at a high rate, that could change, but given the wide range of industry and worker groups on both sides of the political spectrum against tariffs, I don't think high tariffs are likely. 

The rapid surge of orders First Solar has booked in recent months was more a one-time event than a fundamental change in the business. Now, the company's focus should be on completing its manufacturing upgrades and turning that windfall of bookings into sustainable profits.