First Solar: Optimism Finally Pays Off – Another Deal (NASDAQ:FSLR)

First Solar: Spike in June, then Bear Market followed

First Solar, Inc. (NASDAQ:FSLR) investors endured a difficult three months as shares of the leading US solar technology company failed to recapture their highs. which it hit in June 2024. Consequently, FSLR fell deep into a bear market through the August 2024 lows, down over 35%. First Solar’s second quarter earnings release at the end of July 2024, likely calmed investor nerves as the market reassessed its growth outlook amid heightened geopolitical uncertainties.

The market also has to deal with the upcoming US presidential election. With an election that could go either way, First Solar investors must expect potential headwinds from a second Donald Trump administration. Despite this, Kamala Harris’ confident showing at the recent presidential debate likely helped calm renewable energy investors as FSLR buyers tried to hold the recent consolidation.

In my previous bullish FSLR article, I urged investors to capitalize on the market’s overblown pessimism given its robust execution. We have also indicated that the market will likely look beyond the challenges that have engulfed stocks over the past year as interest rates have likely peaked.

First Solar: The Fed is expected to cut interest rates

Investors will likely get what they’re asking for (a rate cut) as the Fed meets this week for its two-day conversation. Fed Chairman Jerome Powell is expected to announce a critical reversal of the FOMC’s policy stance, initiating a much-anticipated interest rate cut on Wednesday. However, significant uncertainty remains about how quickly the Fed could cut interest rates given the mixed signals about the strength of the US economy. The Fed also needs to be careful with its messaging, as investors will likely gauge whether the Fed is confident it will avoid a hard landing.

First Solar’s domestic manufacturing capabilities have been strengthened as it uses IRAs (tax credits under section 45X) to lift its earnings outlook in the second half. As a result, management expects to record $240 million (Q3) and $335 million (Q3) in tax credits, respectively. It therefore provided clarity on First Solar’s near-term profitability guidance, justifying the optimism that drove FSLR to June 2024 highs.

Despite my optimism, First Solar’s bullish case is still susceptible to “dumping” challenges attributed to Chinese solar firms. It is increasingly clear that China’s ambitious solar ramp has solidified its ability to dominate the market. Therefore, China’s solar supply chain leadership should not be underestimated. In other words, I assess that First Solar operates in a highly commodity solar industry. While it believes it can improve its competitive advantages with its advanced thin-film PV modules, China’s substantial cost advantages pose significant execution risks for First Solar.

Despite this, First Solar’s long-term backlog has been cleared, suggesting that its domestic capacity expansion is aligned with increased revenue conversion prospects. In addition, data center expansion plans have caused an unprecedented increase in electricity demand. The drive for the largest hyperscalers to turn to renewable energy sources such as solar power should support robust demand growth through 2030. Accordingly, I assess that the medium-term growth drivers supporting the bullish proposition of FSLRs have improved.

Recent reports suggest China’s top solar firms may have weathered the worst, given the losses they’ve suffered over the past year. Therefore, a period of consolidation could follow, helping to reduce the intense competition that has hit the industry. A more streamlined sales and pricing strategy could be seen, which could benefit companies like FSLR.

However, it remains to be seen whether the IRA could be repealed (at least partially). Therefore, I assess that the market will likely be adamant about taking the stock to another peak (similar to June’s) unless management provides a much improved outlook.

Is FSLR stock a buy, sell or hold?

FSLR’s rating is still reasonable (“C+” rating grade), even though it boasts a best-in-class “A” growth grade. However, investors should be cautious about the reliability of its outlook, as First Solar lacks the market dominance that could shape industry dynamics decisively in its favor.

In addition, the tense political landscape remains highly uncertain. Management also alluded to such risks in FSLR’s Q2 earnings conference call, noting that “the solar industry is once again facing an uncertain political environment.” Therefore, the market is likely to be cautious about rerating FSLR significantly as management also indicated that “its funding parties are waiting to make investment decisions until they have a clear policy picture.”

Despite my caution, FSLR’s forward adjusted PEG ratio of 0.66 is more than 65% below its sector median. Therefore, I think it is arguable that the market has priced substantial execution risks against its bullish thesis. Furthermore, FSLR’s constructive consolidation from its August lows ($195 level) over the past six weeks suggests that buyers have not given up as they likely piled on the weakness.

Rating: Maintain Buy.

Important Note: Investors are reminded to do their due diligence and not to rely on the information provided as financial advice. Consider this article supplementing the necessary research. Please always apply independent thinking. Note that the rating is not intended to time a specific input/output at the time of writing, unless otherwise stated.

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