Please ensure Javascript is enabled for purposes of website accessibility

Why First Solar’s Growth Story Isn't What You Think

By Travis Hoium - Updated Mar 1, 2018 at 1:37AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As First Solar reduces its focus on solar project development, it may actually shrink revenue long-term.

First Solar (FSLR 0.79%) is going through a couple of major transitions in its business model that will impact operations for years to come. The transition that's gotten the most attention is the upgrade from Series 4 to Series 6 solar panels, which will cost less to produce and install than the older model. 

But another big transition is First Solar's moving away from building and then selling solar systems to primarily selling solar components. In particular, First Solar will focus on selling solar panels, which means sales per watt could fall significantly long-term. Here's how it could impact finances. 

Large solar farm in the desert.

Image source: First Solar.

Making less with more

In 2017, First Solar produced 2,283.9 MW of solar panels and generated $2.941 billion in revenue. While the timing of production and revenue recognition doesn't line up perfectly, the $1.288 per watt in sales is a decent gauge for what the company is generating for each unit of production. 

Guidance for 2018 is for 2.9 to 3.0 GW of solar panel shipments and $2.45 billion to $2.65 billion in revenue, or $0.864 per watt. That's a significant reduction versus 2017 and shows the impact of changes in the business model that will reduce project development to only about 1 GW out of the 5.7 GW of production. Long-term, we should expect revenue per watt to decrease as fewer fully developed projects are sold. 

How much will sales fall? 

First Solar is increasing production to 5.7 GW by the end of 2020, but if sales per watt decline, it may not mean higher profitability. Below is a chart with revenue at different revenue-per-watt levels and potential operating profit assuming an 18% gross margin (based on management comments) and $400 million of operating costs (the low end of 2018 guidance). 

Metric Low Revenue Medium Revenue High Revenue
Revenue per watt $0.50 $0.65 $0.80
Total revenue $2.85 billion $3.71 billion $4.56 billion
Gross profit $513 million $667 million $821 million
Operating profit $113 million $267 million $421 million

Calculations by the author based on First Solar management's comments. 

You can see that if revenue per watt falls to $0.50, First Solar won't be far above breakeven. This isn't out of the question because solar panels today cost $0.30 to $0.40 per watt, so panel-only sales will be even lower than $0.50 per watt. There's some upside compared to solar panel prices from limited project development and engineering, procurement, and construction contracts as well as O&M, but it's unlikely First Solar will ever see $1 per watt in sales ever again. 

I'll also note that a gross margin of 18% is probably optimistic long-term. Management has said that gross margins are expected to be over 20% for solar panel sales in the next year, but as U.S. solar tariffs subside and competing technologies lower costs, we'll see gross margins shrink again. This is a consistent trend in the history of solar manufacturing. 

Is First Solar going to be as profitable as investors think? 

Investors who think First Solar will be a massive growth engine for the next half-decade may be surprised to see that strategic shifts the company is making could mean that revenue will decline even as production increases. 

The numbers above are just projections, but they show how First Solar's market cap of $6.8 billion may make the stock expensive when Series 6 production reaches full steam. Even when you consider the $2.1 billion to $2.3 billion in net cash expected at the end of 2018, at best I think shares will trade for 10 times operating profit in 2020, a ratio that has hovered in the mid-single digits for the past year, with lots of room for downside if gross margins are in the mid-teens. The stock may already be priced to perfection.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$70.62 (0.79%) $0.55

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.