Cheap and benefiting from AI

First solar energy (NASDAQ:FSLR), an Arizona-based global solar energy solutions provider, is a low-cost beneficiary of artificial intelligence that until recently was ignored by the market. FSLR stock rose more than 30% between May 20 and May 22 based on two pieces of news. First, UBS (NYSE:UBS) recognized the company as a major winner in AI-driven electricity demand. Second, China has pledged to support the solar industry by ending the price war, which has significantly impacted the sector’s profitability. I’m bullish on FSLR stock as I believe its projected growth has not yet been accurately reflected in its valuation.

AI opportunity

The rise of generative AI has put enormous pressure on global electrical grids because AI applications require significant amounts of energy to operate. According to a study by Dr. Alexandra Sasha Luccioni, head of artificial intelligence and climate at Hugging Face, generative AI systems consume approximately 33 times more energy than computers running task-specific applications.

According to the International Energy Agency, global data centers consumed 460 terawatt hours of electricity in 2022 and will consume over 1,000 terawatt hours of electricity by 2026, which will increase exponentially due to the growing use of artificial intelligence. According to the IEA findings, this projected electricity consumption of data centers will be equivalent to that of Japan with a population of 125 million.

A quick look at energy consumption trends among leading AI companies confirms that energy consumption has increased as a result of AI investments. For example, Microsoft (NASDAQ:MSFT) in its 2023 Environmental Sustainability Report published earlier this month showed that greenhouse gas emissions have increased by almost 30% since 2020, mainly due to the construction of new AI-enabled data centers.

AI opportunities for First Solar arise from carbon neutrality goals adopted by governments and multinational companies in the face of AI developments. For example, the United States has pledged to reduce carbon emissions by at least 50% compared to 2005 levels by 2030. Microsoft, on the other hand, has pledged to become carbon negative by 2030. The company also has an ambitious goal to remove all carbon dioxide emitted by the company since its founding by 2050.

Apple (NASDAQ:AAPL) has also committed to achieving carbon neutrality in its supply chain and products by 2030. Given the massive increase in electricity consumption due to AI, large enterprises investing in AI will be forced to source energy from sustainable sources , and First Solar can be seen as one of the biggest winners of this highly anticipated development.

Investing for growth

First Solar is investing in expanding its U.S. production capacity to meet anticipated growth in solar energy demand. During its first-quarter earnings call earlier this month, the company discussed expansion plans in Ohio, Alabama and Louisiana.

The company is also focusing on the development of advanced photovoltaic technology to improve cost efficiency and therefore profit margin. First Solar, for example, plans to launch a perovskite development line and a new innovation center in the second half of this year.

China provides good news for FSLR stock

On May 22, Chinese regulators pledged to restrict sales of solar equipment materials at below-cost prices, which is good news for established solar companies. Due to the growing number of photovoltaic equipment manufacturers, production facilities have expanded over the past few years, leading to oversupply on the market. Solar companies have been pressing the Chinese government to intervene for months, hoping to eliminate companies that undercut market prices.

First Solar, as an established global player, will benefit from the Chinese government’s decision to take action to end price wars in the solar energy sector.

Do analysts think First Solar Stock is worth buying?

On May 21, UBS analysts Jon Windham and William Grippin stated that First Solar would benefit from large tech companies’ power purchase agreements as these tech giants committed to using renewable energy sources to meet growing energy consumption in the era of artificial intelligence. Analysts predicted a significant increase in First Solar’s earnings per share, from $7.74 in 2023 to $36.74 in 2027. UBS raised the price target for First Solar to $270 from $252 and reiterated its Buy rating.

Piper Sandler analyst Kashy Harrison followed suit and raised First Solar’s price target to $219 from $195. Additionally, JPMorgan (NYSE: JPM) recently raised its price target from $240 to $262 and maintained a Buy rating, while Susquehanna set a price target of $258 after factoring in projected AI-driven renewable energy demand. Roth Capital Markets analyst Philip Shen also believes First Solar will be a key beneficiary of the booming artificial intelligence sector.

Overall, based on ratings from 27 Wall Street analysts, the average price target for FSLR stock is $238, which implies a downside risk of 14.5% from the current market price.

While analyst price targets suggest that investing in First Solar is risky today, recent updates indicate that the average price target could continue to rise for the foreseeable future. This expectation is based on the company’s favorable position in the renewable energy market and its potential to benefit from increased demand for electricity.

First Solar is currently trading at a forward P/E of just 20x, making it a cheap valuation considering analysts are forecasting 5x earnings per share growth by 2027.

Takeaway: First solar power is cheap and attractive

First Solar is well positioned to meet the growing demand for electricity resulting from the development of artificial intelligence technologies. The company appears to be undervalued in the market, and recent updates by Wall Street analysts will likely act as a catalyst to push the stock higher. China’s pledge to support the solar sector by targeting suppliers that undercut prices will also add to the recent momentum in First Solar stocks.

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