I last updated investors in leading solar energy company First Solar, Inc. (NASDAQ:FSLR) in October 2022, assigning a Sell rating as the broad market bottomed. I suggested the market has likely baked in significant optimism into its valuation and didn’t think it was sustainable. While the thesis could have been timed better, FSLR still underperformed the S&P 500 since my previous update, posting a total return of 18.6% against the SPX’s 26.4% gain. As a result, I believe the Sell thesis played out eventually, as solar energy stocks took a hammering over the past year.

Accordingly, FSLR wasn’t immune from the battering, declining nearly 45% from its May 2023 highs through its recent November lows. Despite that, FSLR still outperformed the stocks of leading solar energy peers such as Enphase Energy (ENPH) and SolarEdge (SEDG), which fell 67% and 74% in total return terms over the past year. In contrast, FSLR declined just 7% over the same period, suggesting the collapse was much less pronounced.

I gleaned that FSLR’s relative outperformance is justified, as the company’s primary exposure to the utility-scale PV market has helped mitigate the impact faced by Enphase and SolarEdge over the past year. The high-interest rate environment has significantly affected the residential and commercial market, but much less for First Solar, given its solid growth momentum.

Observant investors should be keenly aware of First Solar’s technological advantage with its thin-film technology solar PV relative to the market’s typical crystalline silicon tech. Furthermore, it has benefited from the Inflation Reduction Act, or IRA, as it affirms its plans to commit to domestic production. Therefore, First Solar remains well-poised with a long-term backlog that reached 81.8 gigawatts in Q3, with net bookings of 6.8 gigawatts added. As a result, First Solar’s operating performance has demonstrated remarkable resilience, as its YTD bookings increased to 27.8 gigawatts.

Management stressed that the company is “focused on achieving its forecasted goal of 25 gigawatts of global nameplate capacity by 2026.” In the process, First Solar expects to ramp its domestic capacity markedly, anticipating the nameplate capacity in the US to reach about 14 gigawatts.

Given First Solar’s significant fixed cost leverage, investors must pay close attention to the company’s ramp, which could affect its growth trajectory toward free cash flow or FCF profitability in the medium term. Accordingly, First Solar has an “80% fixed operating profile,” implying that “the company’s primary lever to expand operating margins is through capacity additions.”

Given the secular tailwinds from the IRA and the benefits that accrue to First Solar from domestic production, I believe the company is well-positioned to continue leading from the front against the leading competitors from China. However, the industry’s offerings are still somewhat commoditized, suggesting gaining a sustainable economic moat remains challenging. Therefore, despite its thin-film leadership, I urge investors to pay close attention to the demand/supply dynamics in the solar PV market, as management also cautioned in its Q3 earnings call.

Management telegraphed that it observed “alleged dumping behavior is driven by overcapacity in China’s crystalline silicon industry.” As a result, First Solar believes the behavior represents “a threat to non-Chinese manufacturing.” Notably, management highlighted that it anticipates a significant increase in European inventory, possibly reaching 100 gigawatts by the end of 2023. Accordingly, First Solar stressed that these modules are “reportedly being sold below manufacturing cost.” Therefore, I believe the threat from Chinese solar PV manufacturers could remain a near-term headwind, suggesting investors should remain cautious about expecting a sharp improvement in early 2024.

At a forward P/E of 13x, I believe FSLR’s valuation has dropped significantly from the 26x average over the past year. Moreover, FSLR’s adjusted EPS is still expected to grow 65% in FY24 and 64% in FY25, suggesting the market could be overly pessimistic.

Seeking Alpha Quant’s relatively attractive “B” valuation grade and “A” growth grade suggests a discernible dislocation for a best-in-class growth profile. Therefore, if buying sentiment is well-supported, astute investors could consider capitalizing on the dislocation to add exposure.

I assessed FSLR’s buying sentiment as well-supported since it bottomed out in November 2023. It’s a pivotal zone to defend, although it remains markedly above the 50-month moving average or MA (blue line).

Notwithstanding that caution, I gleaned a robust bear trap or false downside breakdown (see price action glossary) at the $130 level, suggesting a long-term bottom is possible, coupled with solid growth metrics and an attractive valuation.

Therefore, I’m ready to do a double upgrade on FSLR, suggesting the worst is likely behind us.

Rating: Upgraded to Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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