Will First Solar be a beneficiary of the artificial intelligence boom?

Shares of First Solar have performed well this year, up more than 50% year-to-date in 2024, as they benefit from favorable regulatory conditions, easing supply chain issues and strong demand for renewable energy. The company’s recent results were also better than expected. While revenues rose 45% year-over-year to $794 million, earnings beat estimates of $2.20 per share. In addition, investors are also betting that the company may also become a beneficiary of the dynamically developing artificial intelligence industry.

There is optimism that higher demand for AI-based applications will drive demand for solar power as large tech companies build massive data centers powered by graphics processing units. AI-based queries are computationally intensive and consume more electricity. By some estimates, a typical AI query uses about 10 times more electricity than a regular search engine. Solar energy may be the ideal form of energy to fill this energy gap, given its low costs and low carbon intensity. While there are limits to renewable energy sources, given the intermittent nature of power generated depending on weather conditions and time of day, large tech players typically use renewable power purchase agreements to offset their fossil fuel consumption. The energy demands of AI may increase as AI models become more sophisticated and move beyond processing not only text but also generating images and videos. First Solar should be a big beneficiary of this trend for several reasons. First, the company’s cadmium telluride panels are preferred for large, utility-scale solar installations compared to many other players that focus on rooftop installations. Moreover, the company has a solid presence in the United States, where much of its AI activity remains. First Solar generated more than 95% of its net sales last year from the United States alone.

The current regulatory environment is also very favorable for U.S. solar manufacturers like First Solar. The Biden administration recently raised tariffs on solar cells imported from China from 25% to 50%, which will make U.S. manufacturers more competitive. Separately, First Solar also benefits from a Section 45X tax credit under the U.S. Inflation Reduction Act, given that it is producing an increasing portion of its production in the U.S. Looking ahead, in late December 2023, the company announced that it had signed agreements to sell up to $700 million in tax credits earned under the Act in 2023. The company is likely to benefit from between $1.0 billion and $1.05 billion in Section 45X tax credits this year, which will directly increase its operating profits.

First Solar’s manufacturing base is also growing, driven by capacity expansion in Ohio. Total 7-Series panel production capacity in 2023 was 16.6 GW, and the company expects this capacity to increase to over 25 GW by 2026, driven by the expansion of 7-Series panel production in the U.S. in locations such as Alabama , Louisiana and Ohio. First Solar also has a sizable booking backlog, which has grown to over 78 GW at the end of March 2024, up from 61.4 GW at the end of 2022. This gives the company solid revenue and gross margin visibility, with approximately prices blocked in case of 95% arrears.

FSLR stock has seen an extremely strong 160% rise from $100 in early January 2021 to around $260 today, compared to a rise of around 45% for the S&P 500 over this roughly 3-year period. However, FSLR stock growth has been far from steady. Stock returns were -12% in 2021, 72% in 2022 and 15% in 2023. In comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022 and 24% in 2023 – pointing to This FSLR underperformed the S&P in 2021 and 2023. In fact consistently beating the S&P 500 – in good times and bad – in recent years it has been difficult for individual herds; for information technology heavyweights including MSFT, AAPL and AVGO, and even megacap stars GOOG, TSLA and AMZN.

And the high-quality Trefis portfolio with a collection of 30 stocks has outperformed the S&P 500 every year in the same period of time. Why? As a group, HQ Portfolio shares delivered better returns with less risk compared to the benchmark index; less of a roller coaster as seen in the HQ portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FSLR find itself in a similar situation to 2021 and 2023 and worse than S&P in the next 12 months – will it be a strong jump?

Overall, we believe there are many long-term benefits for the solar sector as a whole and for First Solar in particular. The macro situation is improving. Inflation has cooled significantly. The Federal Reserve is considering a possible interest rate cut in 2024. This should bode well for renewable energy stocks, making financing for large projects more affordable. First Solar is emerging as one of the biggest beneficiaries of U.S. efforts to encourage domestic production of renewables, given its vertically integrated production. That said, there are also risks. Much of First Solar’s strong financial performance can be attributed to the Inflation Control Act, and the upcoming U.S. presidential and congressional elections later this year could prove risky for the company. The tax breaks associated with the Inflation Reduction Act could be modified if Republicans, who typically favor a market-based approach over subsidies for renewable energy sources, come to power. That said, we remain neutral on First Solar stock, with a price estimate of $235, which is slightly below the current market price. See our analysis First solar energy valuation: : Expensive or cheap for more details.

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