Investors in thin-film solar specialist and solar farm builder First Solar (FSLR 0.54%) have had mixed news so far this week. Yesterday, StreetInsider.com reported that JMP Securities raised its price target on the stock to $105. But this morning, Goldman Sachs downgraded First Solar all the way from buy to sell. The stock was down 9% on the day as a result.
Why did Goldman Sachs downgrade the stock, and why so drastically?
As Goldman explained, "Our Sell thesis is predicated upon our view that FSLR's gross margins and EPS power are peaking in the near-term (by mid-'21)." Sliding gross profit margins will result in as much as a 17% annualized decline in net income at the company over the course of 2021 and 2022, Goldman warned. And with that prospect, the analyst is predicting that First Solar stock will close this year as low as $81 a share, versus the $92 or so it costs right now.
Not only did First Solar stock drop nearly 10% today, but Goldman Sachs is predicting the stock has another 12% to fall before all the selling is done, and I cannot say it's wrong about that.
Whether or not profit margins collapse as the analyst predicts, First Solar stock already looks extremely overvalued at a share price of roughly 48 times trailing earnings. Moreover, free cash flow (FCF) at the company still lags reported net income badly. With FCF of just $147 million over the past 12 months, for every $1 that First Solar reports as GAAP net income, the company only really collects $0.66 in real cash profits.
The stock is overpriced today, and if Goldman Sachs is right about the peak earnings, First Solar stock is going to look even more overpriced as time goes on.