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First Solar: Can Thin-Film Keep Up?

By Travis Hoium - Dec 13, 2017 at 11:14AM

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If First Solar's strong run is going to continue, it's going to have to improve efficiency in 2018.

2017 was a banner year for First Solar, Inc. (FSLR -1.34%) for a number of reasons. It sold large solar developments for more money than expected, resulting in a short-term boost in earnings. The Suniva trade case was also a surprising windfall, driving at least 6.7 GW of solar panel bookings -- about two years of production -- in the first three quarters of the year. 

The upgrade from Series 4 to Series 6 solar panels is also driving enthusiasm about First Solar and will improve the company's cost per watt profile long term. But there's a risk investors should keep in mind that may undermine the current enthusiasm surrounding First Solar. 

Solar array in a desert with a partially cloudy sky in the background.

Image source: First Solar.

What First Solar's guidance tells us about Series 6

Last week's analyst day gave investors a good look into what to expect from the Series 6 solar panels in the future. Efficiency is "over 17%" today, on par with the 17% efficiency for Series 4 modules produced in the third quarter of 2017. But a much larger form factor of 2 meters by 1.2 meters will result in lower installation costs by reducing labor and wiring. 

On top of introducing Series 6, management announced full-year guidance for 2018, including an expected gross margin of 22% to 23%. That's notable because most of the 2018 bookings were made when First Solar was taking advantage of the threat of solar tariffs on most of its competitors' panels. This should be when margins are at their peak given the short-term windfall, but margins were only marginally above competitors like Canadian Solar (CSIQ -5.50%), JinkoSolar (JKS -3.18%), and JA Solar (NASDAQ: JASO), who are commodity suppliers. 

FSLR Gross Profit Margin (TTM) Chart

FSLR Gross Profit Margin (TTM) data by YCharts.

To put the margin into perspective, if First Solar were able to command a $0.05 per watt premium on 2018 bookings (probably on the low side), charged $0.45 per watt instead of $0.40, and cost per watt was $0.35, there would be a boost in gross margin from 12.5% to 22.5%. That means the steady state gross margin would be in the low teens, and in that context, the 2018 gross margin guidance isn't all that impressive -- especially when you see what's coming down the pipeline in solar panels. 

The big threat to First Solar long-term

Any windfall from the threat of solar tariffs will likely be short-lived, and that's why First Solar booked as much as it could in mid-2017. It was capturing the windfall in case tariffs didn't come to fruition

Tariffs would come out in January 2018 if they're going to be implemented, and by 2019, manufacturers will likely have adapted to the new market conditions in the U.S., whether that means building manufacturing here or exploiting any loopholes that arise. 

What has me truly more worried, long term, is that most major silicon solar manufacturers are investing in mono-PERC manufacturing, which will raise solar panel efficiencies to well over 17% and reduce First Solar's performance advantage. SunPower (SPWR -10.78%) already has a 17% efficient panel on the market using cheap multi-crystalline cells, and it says a 19% efficient panel using mono-crystalline cells will be available by the end of the year. Canadian Solar, JinkoSolar, and others are making similar advancements. 

The reason mono-PERC is important is that it takes away some of the advantages First Solar has in harsh environments. Mono-crystalline construction also doesn't degrade as quickly as tradition multi-crystalline cells, meaning higher energy production over the long term. First Solar will have to improve efficiency to well over 17% just to keep up. And given the competition, the 22% to 23% gross margin forecast for 2018 likely marks a high point. 

First Solar's challenge comes in the lab

It isn't like First Solar doesn't see the efficiency challenge ahead. It has hit 22% cell efficiency in the lab, which it says will make a panel with 20% or higher efficiency on the panel level. And management says there's visibility to cell efficiencies of 25% or higher. But these advances need to come faster than silicon makes similar efficiency advancements. 

Investors shouldn't look at First Solar's recent bookings or margin forecasts as an indication of where the company will be long-term. There were some one-time benefits the company did a great job exploiting but they won't last forever. With high-efficiency competition ramping up in 2018 and 2019, First Solar could have a hard time charging a premium for solar panels long-term, something worth considering if you're looking into this solar manufacturing giant. 

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
$66.84 (-1.34%) $0.91
SunPower Corporation Stock Quote
SunPower Corporation
$15.14 (-10.78%) $-1.83
Canadian Solar Inc. Stock Quote
Canadian Solar Inc.
$30.09 (-5.50%) $-1.75
JinkoSolar Holding Co., Ltd. Stock Quote
JinkoSolar Holding Co., Ltd.
$64.23 (-3.18%) $-2.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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