Up 33% This Year: Will Washington Changes Destroy First Solar’s ​​Stock Gain?

First Solar shares have had a solid year, up about 33% year to date. By comparison, shares of Enphase Energy, another player in the solar components market, have fallen 18% during the same period. First Solar shares have benefited from several factors.

First Solar’s ​​financial results have been solid in recent quarters. First Solar’s ​​revenues rose 45% year over year in the first quarter of 2024, while net profit margins also increased to more than 28%, up from about 8% in the same period a year earlier. While earnings are being driven in part by favorable regulatory tailwinds and easing supply chain constraints, First Solar’s ​​more efficient thin-film solar panels and focus on large-scale solar projects are also likely to help the company as volumes continue to grow. Solar demand remained strong, with the company recording about 2.7 gigawatts of bookings from January through early May, bringing its total order backlog to 78.3 GW, giving the company significant visibility into demand.

The current regulatory environment is also very favorable for U.S. solar panel manufacturers like First Solar. The Biden administration recently raised tariffs on solar cells imported from China from 25% to 50%. This should prevent dumping by the Chinese, given China’s massive excess capacity, and the country’s solar panel production capacity is expected to be more than twice global solar demand in 2023. Separately, First Solar also benefits from the Section 45X tax credit under the U.S. Inflation Reduction Act, given that it is increasingly focusing its production in the U.S. For perspective, in late December 2023, the company announced that it had signed agreements to sell up to $700 million in 2023 tax credits it earned under the act. The company is also likely to realize between $1.0 billion and $1.05 billion in Section 45X tax credits this year, which will directly boost its operating profits.

The growing demand for AI applications is expected to lead to increased use of solar energy as big tech companies build massive, energy-hungry data centers to support their computationally intensive AI systems. Solar energy is an ideal energy source to power some of this growing electricity demand, given its relatively low cost and low carbon intensity. Although renewable energy sources like solar have limitations due to their intermittent nature, tech giants often use renewable power purchase agreements to offset their fossil fuel consumption. First Solar is well-positioned to benefit from this trend, given its focus on utility-scale panels and strong presence in the U.S., which is a pioneer in the AI ​​space.

FSLR stock has seen an exceptionally strong rally of 130% from $100 in early January 2021 to around $230 today, compared to around 50% for the S&P 500 over those 3 years or so.

However, FSLR stock’s growth has been far from steady. Stock returns were -12% in 2021, 72% in 2022 and 15% in 2023. By comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022 and 24% in 2023 – indicating that FSLR underperformed S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been tough for individual stocks in recent years; for IT giants like AAPL, MSFT and NVDA, and even for capitalization giants like GOOG, TSLA and AMZN.

In contrast, the Trefis High Quality portfolio, consisting of 30 stocks, has outperformed the S&P 500 every year in the same period of time. Why? As a group, HQ Portfolio stocks delivered better returns with less risk compared to the benchmark index; it was not as exciting an experience as HQ Portfolio’s performance metrics suggest.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FSLR find itself in a similar situation as in 2021 and 2023? underperform the S&P in the next 12 months – or will there be a sharp increase?

Overall, we believe there are many long-term positives for the solar sector as a whole and First Solar in particular. Things are improving on the macro front. Inflation has cooled significantly. The Federal Reserve is considering cutting interest rates in 2024. This should bode well for renewable energy stocks as financing for large-scale projects becomes more affordable. First Solar is emerging as one of the primary beneficiaries of US efforts to encourage domestic renewable energy production, given its vertically integrated manufacturing. That said, there are also risks. Much of First Solar’s ​​strong financial performance can be attributed to the Inflation Reduction Act, and these headwinds are likely to eventually fade. Additionally, the upcoming US presidential and congressional elections later in 2024 could prove risky for the company. The tax breaks in the Inflation Reduction Act could be modified if Republicans, who typically favor a market-based approach to renewable energy subsidies, take control of the White House and Congress. Donald Trump has a 2.3-point lead over Joe Biden, according to FiveThirtyEight’s polling average. Despite this, we remain neutral on First Solar shares, with a price estimate of $235, roughly in line with the current market price. See our analysis First solar energy valuation: Expensive or cheap for more details.

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