I'm a big fan of solar, and in particular, solar-panel manufacturing giant First Solar (NASDAQ:FSLR). A leader in building solar panels for the utility-scale segment, First Solar also has by far the strongest balance sheet of any solar company, giving it a massive leg up in what continues to prove a very cyclical business.
And with the coronavirus pandemic bringing the global economy into recession, investors can buy First Solar stock for 26% less than it cost only a few months ago, and 34% below its 12-month high. I think that's a bargain price for an excellent business.
But is First Solar a millionaire-making investment? I'm not so sure. In the past I've tended to think so, but with history to guide us, I'm not so sure its future prospects are that great.
Here's why I think that way...but also why the stock is still part of my portfolio, and one I think is worth buying right now.
The argument for First Solar
On the surface, there's a ton to like about the company's prospects. It's the leader in utility-scale solar panels, with its thin-film technology a competitive differentiator in this hypercompetitive space. Simply put, utility customers looking to deploy solar want to maximize the power they can generate, and First Solar's thin-film panels, though lower-efficiency than silicon-based versions, have a lot of advantages. They tend to handle temperature extremes, dust, humidity, and other environmental factors far better than other panel types.
For a utility buyer, that means less fluctuation in power output due to things outside its control, resulting in more predictability. And in the utility business, predictability is invaluable.
Next, we have the company's massive balance sheet, with $2.2 billion in cash and investments versus $472 million in total debt. This veritable mountain of liquidity has served the company well in a very cyclical industry. Solar-panel demand is growing, but it fluctuates from year to year, and mainly due to orders for the large-scale projects that are First Solar's bread and butter.
Lastly, note the potential for growth in the solar industry. Over the next decade, the global population will add about 1 billion members to the middle class. Low-cost and zero-emission power from solar will generate a large portion of the electricity these new consumers demand. Moreover, solar will also play a big role in replacing coal and older natural-gas power generation at lower costs.
You could also make the case that First Solar could be the Nucor (NYSE:NUE) of the solar industry. Nucor has certainly been a millionaire-maker. Over the past 50 years, Nucor has generated more than 26,000% in total returns (that includes dividends paid) while operating in one of the toughest, most cyclical industries out there: steelmaking.
Nucor has delivered these sorts of returns by building operations with some ability to flex costs up and down based on demand -- a necessity in a cyclical industry -- and prioritizing a strong balance sheet. First Solar has done a solid job in both areas, proving it can navigate a cyclical industry with strength.
The argument against its millionaire-making potential
First Solar is a leader, and its regular spending to improve its products has kept the company competitive. But at the same time, solar costs have fallen sharply over the past decade and are expected to fall even further. This, along with the aforementioned cyclical nature of solar panel demand, has kept the company from being able to regularly grow its revenue, even as solar-panel sales have increased:
Yes, First Solar is in the midst of a massive upgrade of its manufacturing, which will push its capacity from 6 gigawatts at the end of last year to 8 gigawatts by 2021. That should pay off with bigger sales and even stronger cash flow.
That said...unless you've bought First Solar stock at one of its low points over the past five years, there's a chance it's actually been a losing investment for you so far:
And I'm afraid that the highly cyclical nature of solar-panel demand will continue to cause First Solar's results -- and its stock price -- to swing wildly across the cycle.
Let's also go back the Nucor comparison. While First Solar has some similarities to the peerless steelmaker, Nucor has also proven adept at capital allocation. The company has delivered enormous value by acquiring competitors during market downturns, and investing in its own facilities when times are good. So far, First Solar has proven good at investing in itself, but has yet to take market share by acquiring a troubled competitor at a discounted value. And since it lacks a track record as a successful large-scale acquirer, I'm not willing to include that potential in any thesis for the company.
First Solar is still a buy today
While First Solar may never have what it takes to create the wealth of a company like Nucor, I think it still belongs in investors' portfolios, particularly at recent prices. The solar industry is in growth mode, and will be for the next decade or more. At some point we'll start to see more consolidation, and that should be in First Solar's favor, with a balance sheet that will allow it to be a buyer in every buyer's market.
Moreover, its next round of growth will grow its manufacturing capacity by about one-third. That makes now, with the stock down more than 30% from its recent high, an ideal time to buy -- and to hold for the next three to five years.