Shares of First Solar (FSLR 0.97%) have nearly doubled in a month on the back of strong earnings and the passage of the Inflation Reduction Act, and this may just be the start of the company's momentum. First Solar is building two new manufacturing plants at a time when solar panel prices are rising, and demand is growing around the world.
Even after the recent increase in First Solar's valuation, there are three great reasons to buy this renewable energy stock.
First Solar's lead in solar manufacturing
The thin-film solar panels First Solar makes work better in extreme conditions, like in deserts or near coastlines, and that's allowed the company to charge a premium versus commodity crystalline silicon solar panels. You can see below that First Solar's margins have been higher in recent years than those of Canadian Solar and JinkoSolar, two leading competitors in commodity panels.
To take advantage of the strong margins, management is expanding manufacturing capacity in the U.S. and India, which will allow it to serve two important and growing markets. Management said in its first-quarter conference call that shipping could be $0.04 to $0.05 per watt, or 20-25% of the cost of a solar panel, which makes local manufacturing highly valuable.
Solar energy production is growing worldwide, and First Solar is a leader. That's a great position to be in long-term.
A balance sheet for any market condition
The solar industry can be extremely volatile, so a solid foundation is important. First Solar has $1.9 billion in cash and equivalents on the balance sheet, and expects to still have $1.3 billion to $1.5 billion at the end of the year, despite spending $850 million to $1.1 billion on capital expenses to grow capacity.
On top of the great balance sheet, the company has 44.3 gigawatts of backlog, which management said means production is sold out through the end of 2024. That's about as solid a foundation as there is in solar energy.
Fuel from the Inflation Reduction Act
The recent passage of the Inflation Reduction Act should bring billions more dollars into the solar industry, and it'll have two big impacts on First Solar. First, there's $37 billion in clean manufacturing tax credits that should benefit First Solar's continued U.S. expansion. Second, the 30% investment tax credit was extended for ten years, which will be a helpful subsidy to First Solar's customers.
This bill is a tailwind for First Solar that should incrementally help both demand and margins in the U.S.
A leader in solar energy
The solar industry continues to grow, and that should lead to more demand for solar panels around the world. First Solar is an industry leader with a great technology and a balance sheet that should be able to survive almost any market. With that lead and the tailwinds from the Inflation Reduction Act, First Solar stock is a great buy today.