First Solar, Inc. (FSLR) Has Multiple GW Opportunities: UBS

UBS US research analysts Brent Thill, Amitabh Passi, Steven Milunovich and Stephen Chin maintain neutral ratings for First Solar, Inc. (NASDAQ:FSLR) according to a new report, more details below.

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First Solar’s multiple GW opportunities

We believe First Solar, Inc. (NASDAQ:FSLR)’s project backlog of 2.7GW will likely help support the stock over the next two years while it tries to expand its addressable market beyond utility scale solar. We believe a longer-term view on First Solar will depend on its ability to convert its multiple GW opportunities worldwide into backlog while maintaining its longer-term gross margin target of 15-20%.

We believe strong execution on its solar module/system cost reduction roadmap for its own thin film technology and recently acquired crystalline solar technology from Tetrasun will allow it to grow its total market opportunity beyond utility scale solar to distributed generation, where we expect the highest demand growth over the next five years. Our price target of $55 is based on applying a 16x P/E multiple to our normalized EPS estimate of $3.45.

Upside scenario for First Solar

In our upside scenario, we assume a total solar market size of 55GW, with First Solar, Inc. (NASDAQ:FSLR) maintaining its 6% share of the market. We assume a system average selling price (ASP) of $1.50 per watt and an operating margin of 12%. Under these assumptions, we estimate First Solar can generate $4.80 in EPS; applying an industrial E&C multiple of 16x, we arrive at our upside valuation of $77 per share.

Downside scenario for First Solar

In our downside scenario, we assume a total solar market size of 45GW, with First Solar, Inc. (NASDAQ:FSLR)’s share at 6% and system ASP of $1.50 per watt. We assume First Solar can consistently generate 7% in operating margin and generate EPS of $2.30. Applying a 16x multiple, we arrive at our downside valuation of $37 per share.

First Solar’s business description

First Solar, Inc. (NASDAQ:FSLR) is a vertically integrated global solar energy solution provider. It manufactures photovoltaic solar modules using thin-film Cadmium Tellurium (CdTe) technology and recently acquired crystalline solar technology from Tetrasun. It also provides engineering, procurement, and construction (EPC) services to develop solar plants. The company operates in two segments – the component segment, which involves manufacture and sales of solar modules to third-party developers, and a fully integrated systems business segment, which provides a complete turnkey solar solution.

Solar industry outlook

We believe the solar industry is in the middle of a multi-year transition period between strong demand growth driven by government incentives from 2007-11 and sustainable demand at parity with traditional resources (also called grid-parity). During this transition period, we expect solar energy to reach sustainable levels in different parts of the world, depending on the geography, cost of traditional sources of electricity, and cost of capital. We expect solar costs to decline by 10-15% YoY over the next three years and expect solar demand to grow at a similar rate. We expect utility scale solar demand (where First Solar has a strong presence) to grow 5-10% YoY.