Solar panel manufacturers have been among the hardest solar energy stocks to invest in over the past decade, with price competition and growing capacity in China hampering profitability across the board. Even a profitable leader like First Solar (FSLR -0.09%) has seen its stock fall 6% over the past 10 years, with an incredible amount of volatility in the process. 

If you've been watching this industry from the sidelines, now is the time to get into First Solar stock, because the company is going back into growth mode. It's shed legacy assets that were weighing the company down and investing in what it does best, which is making industry-leading solar panels. A few years from now, we may look back and see this as the best solar energy stock in the industry. 

First Solar power plant in the desert.

Image source: First Solar.

The evolution of First Solar

A lot has happened at First Solar over the past decade. The company was one of the industry's leaders in solar panel manufacturing going back nearly two decades, but in the past 10 years, it has seen increased competition from silicon-based solar panels, primarily made in China. This competition squeezed margins and forced First Solar to upgrade its manufacturing technology quicker than planned nearly five years ago. 

The company also saw solar project development become a highly profitable business, responding by growing its own project development and financing business, through the yieldco 8point3 Energy Partners.

Put it together, and by around 2016, First Solar had built a vertically integrated solar company. But the industry was shifting to a more modular business model, undercutting vertically integrated companies at every corner and forcing First Solar to react. Over the past three years, First Solar has sold most of its project development business, its operating and maintenance business, and even 8point3 Energy. What's left is a leading solar panel manufacturer, and that's about it. 

The idea is that putting more focus on solar panel manufacturing will make First Solar more competitive and more profitable in the long term. And the strategy may be working. 

First Solar's steady-as-it-goes business

Despite all of the turbulence, First Solar's revenue has been fairly steady over the past five years. At the same time, net income has been rising steadily as new manufacturing processes have come online, driving higher margins. At the same time, the simplified business model I mentioned has led to lower operating expenses. 

FSLR Revenue (TTM) Chart

FSLR Revenue (TTM) data by YCharts

The result is a company that's smaller in scope but more profitable in its more limited operations. Logically, the next step will be stepping on the gas on the business and expanding capacity to grow revenue. 

How First Solar becomes a growth stock

First Solar has recently announced two major manufacturing expansions that will about double its capacity. The first is a $680 million investment in the U.S. that will add 3.0 gigawatts (GW) of capacity by the end of 2023 and 3.3 GW in 2025. The second is a $684 million investment in India, which will add 3.0 GW by the end of 2024 and 3.3 GW in 2025. In 2024, management expects the total capacity to be 16 GW, up from expected shipments of 7.6 GW to 8.0 GW this year. 

These capacity additions will double First Solar's solar panel production and should help drive top-line growth. The cost of solar panels is still coming down long-term, which will offset some of the production increase, but price declines have slowed, so we should see revenue come close to doubling in the next four years. 

If revenue does jump, gross margin stays flat or increases, and operating costs don't increase faster than revenue, we should see First Solar's bottom line improve significantly. What I'm looking for is the company to dramatically increase its return on assets, which is net income divided by assets. As a manufacturer, this is a great metric to watch to see how efficiently management is deploying capital. 

FSLR Return on Assets Chart

FSLR Return on Assets data by YCharts

You can see that the return on assets is improving, and with more capacity coming online, I would expect this figure to jump into double digits. If it does, this could be a great growth stock in solar energy.