J.P.Morgan analysts have released a report on First Solar, Inc. (NASDAQ:FSLR) at Overweight with a 2014 year-end price target of $64.00. They view First Solar, Inc. (NASDAQ:FSLR) as the best-positioned pure-play company in a market that should exhibit strong long-term growth. Solar contributes a tiny fraction of global electricity power but is on a technology-led cost trajectory, largely authored by FSLR, that should put this renewable energy source on track to compete head-on with conventional power within 3-5 years. FSLR’s recent capital raise should enable it to get a head-start on this diverse opportunity, building momentum in sustainable markets.
Near-term Challenges, Growth Resumes in 2015
The medium-term outlook for First Solar, Inc. (NASDAQ:FSLR) is somewhat mixed. Contracted revenues provide decent visibility into flattish earnings on revenue growth in 2013, muted visibility into a slight decline in 2014 revenue, and some uncertainty regarding 2014 EPS. 2015 should be something of a ‘harvest’ year for the firm, with a return to top-line and bottom-line growth owing to several key projects (Stateline, Lost Hills, Silver State South, etc), conversion of pipeline into revenue growth, introduction of lower-cost modules, launch of TetraSun, and lower operating expenses (as a percentage of revenue) owing to prior restructuring. They expect long-term top-line growth in the 5-10 percent range and EPS growth in the 10-15 percent range.
Business Model Shifting Towards Systems
First Solar Business Model
FSLR’s business model has evolved to focus primarily on deploying Systems and away from a traditional semiconductor model of competing on price in the commodity module market. First Solar, Inc. (NASDAQ:FSLR) still sells solar modules to third parties, but that portion of revenue now accounts for about 10 percent of total, down from over 90 percent in FY09. The Solar Power Systems segment now represents 90 percent of the business and has grown over 100 percent annually over the past several years. This evolution has led to an increase in visibility, owing to the longer revenue cycles of the Systems business.
First Solar Geographic Mix Increasingly Diverse
First Solar, Inc. (NASDAQ:FSLR)’s geographic mix has also shifted over the past several years. Spurred by government incentives, FSLR’s revenue was historically centered in Europe, representing nearly all of revenue in FY07. As the European business began to decline, the North American segment surged and represented just over 90 percent of revenue in FY12. Encouragingly, the pipeline is very diverse, so they expect the “Other” geography segment – sustainable markets – to increase in the mix.
FSLR’s Net Cash Position Provides Strongest Bankability Position in the Industry
Project financing represents ~37 percent of the total cost of deploying solar capacity. FSLR is the only major solar provider with a net cash position, yielding a lower cost of capital. The company is therefore able to effectively compete on price while still having the highest margins in the industry.
J.P.Morgan realizes that First Solar, Inc. (NASDAQ:FSLR) should capture significant share of the global opportunity owing to the most bankable utility-scale offering, evident in ~45 percent share of the debt-funded market and a leading project pipeline. Competitive advantage originates in proprietary technology, best-in-class margins, and a balance sheet that enables growth; meanwhile, many competitors are struggling to regain competitiveness. A scenario analysis suggests First Solar, Inc. (NASDAQ:FSLR) can achieve peak EPS of $7.00 in 3-5 years.