Sometimes a future investment opportunity is difficult to see.
This is the case for First Solar, Inc. (NASDAQ:FSLR) right now. With a price that is lower than half of what it was in March, First Solar stock may be worth another look.
Before I go into the potential for First Solar stock, let’s take a quick look at the numbers. After that, I’ll delve a bit into what has hammered FSLR stock so much since the spring.
FSLR Stock Growth
To begin with, First Solar’s revenues are not on a tear. FSLR stock is up just 8.12% over the 2013 numbers. So this is not a high-growth company. More troubling for First Solar stock than its slow growth is the fact that only two customers make up some 56% of First Solar’s net sales, and a whopping 84% of their accounts receivable is attributed to those two customers and just one other. So there’s a lot of concentrated risk there. (Source: “2015 Annual Report,” First Solar, Inc., February 24, 2016.)
Aside from that concern, First Solar stock is in pretty good financial shape, with the company having about $1.5 billion in cash as of the end of last year. And it isn’t as if FSLR stock is running operating deficits. It is not. While earnings are choppy, they are still there.
So why has First Solar stock taken the drubbing it has since the first quarter?
Energy prices, specifically crude oil prices, began a steady decline in the middle of 2014 and their recovery has been tepid at best. For some odd reason, renewable energy companies, such as First Solar, got lumped into that basket. When you compare the chart of FLSR stock to that of the Dow Jones Renewable Energy Equipment Total Stock Market Index, you get a sense that the decline in First Solar stock isn’t unique to that company.
Will The Sun Shine on FSLR stock?
This is what I find interesting about FSLR stock right now. The stock’s decline doesn’t appear to be related to an operating problem at the company. And typically, market dislocations like this ultimately get fixed. In my opinion, this fix should mean a rise in First Solar stock. And, there is reason to be optimistic.
In December, U.S. Congress extended the investment tax credit for renewables. So, any renewable project that begins construction prior to 2024 will benefit from the break. This should have a meaningful impact on First Solar’s bottom line for at least the next several years. (Source: “Congressional Record—Senate,” U.S. Congress, December 18, 2015..
And then there are the competitive advantages that are unique to First Solar.
The company is the largest provider of solar energy in the U.S. and it makes one of the most efficient photovoltaic (PV) cells in the industry. While there is much competition in the solar business, the fact that First Solar spends about $111.0 million annually on research and development gives the firm a huge competitive advantage over its competition. (Source: First Solar, Inc., op cit.).
With a determined and deliberate focus on expanding its markets outside of the U.S., I believe that First Solar stock will benefit from a more robust rebound in the global economy in the future. More importantly, First Solar has committed to expanding its presence in emerging market economies which, in my option, could help expand its top-line growth rate.
The Bottom Line for FSLR Stock
And finally, the spin-off of several of First Solar’s power generation projects will help improve free cash flow as the company retains a 31% interest in 8point3 Energy Partners (NASDAQ:CAFD), which was set up as a pass-through entity (much the way energy pipeline companies create master limited partnerships (MLPs)) that generates more than $6.0 million in cash distributions each year. (Source: “Amendment No. 6 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 8point3 Energy Partners LP,” U.S. Securities and Exchange Commission, June 16, 2015.)
So, for long-term investors, the current weakness in First Solar stock could be an opportunity.