First Solar, Inc. (NYSE:FSLR) stock plunged nearly 10% on Thursday to as low as $44.34 per share after analysts at Deutsche Bank downgraded it to Hold. They see downside risk to the company’s 2017 earnings as a result of increased competition, which they believe could pressure its margins.
Chinese competitors to dent First Solar’s margins
Analyst Vishal Shah explained his downgrade of First Solar in a report dated July 6. He explained that his checks suggest module prices in international markets like Mexico are approaching 42 cents per watt with companies like Jinko quoting 39 cents per watt for delivery by the end of this year or early next year. Additionally, he said power purchase agreements are being bid in the $40 to $50 per megawatt-hour range with the lowest bid he observed being at $38 per megawatt-hour. He explained that in order for these economics to work, solar panel systems must be sold for between 80 cents and 90 cents per watt.
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Additionally, he said most solar module manufacturers in China are expanding their capacity outside of their home country so that they can dodge the import duties and pass on the savings to their customers. Shah added that on average, Chinese companies can save about 15 cents per watt by building product outside the U.S. and then importing it into the U.S. As a result, he observed that average selling prices for solar modules in the U.S. are coming in around 54 cents or 55 cents per watt, compared to about 63 cents per watt six months ago.
The Deutsche Bank analyst added that most Chinese solar module manufacturers are also able to sell mono panels of 330 to 335 watts and mono-perc modules with 340 to 345 watts at the mid- to high-50-cents per watt range. He explained that as more higher efficiency solar panels flood the market, First Solar’s Series 4 modules, which bear a power rating of about 120 watts, become less competitive, at least until the Series 5 panels with a rating of 360 watts become available in the second half of next year.
First Solar’s bookings are slowing down
The analyst also warned that First Solar is experiencing a slowdown in bookings momentum. He believes that in the U.S., there is greater uncertainty about the Clean Power Plan. As a result, the timing of utility-scale rollouts is being impacted. Internationally, he said First Solar has some solid opportunities in terms of volumes but also “very aggressive” power purchase agreements by developers assuming that costs will keep falling.
First Solar still expects about 1 gigawatts of systems in the U.S. on an ongoing basis from next year, but Shah sees risk to this projection. He believes the company will have to pick up some major product pipelines in Japan and mostly depend on the U.S. in order to meet this target. He also noted that the solar power company said on the last earnings call that almost 90% of their 3.2 gigawatts of mid-to-late stage bookings were outside the U.S. in markets that are mostly modules only. As a result, he believes that even if First Solar does reveal another ramp in bookings, it will be mostly module bookings rather than systems.