First Solar (FSLR -0.59%) is in the midst of a transition from a solar panel manufacturer and project developer to a pure-play manufacturer. The company has a competitive advantage over fellow solar panel manufacturers with its new Series 6 modules, which feature increased power capacity in terms of watts and improved efficiency that gives the company a chance for significant cost-cutting.
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Who are the major competitors?
Over the past year, First Solar launched a plan to exit the engineering, procurement, and construction business. And when it posted its most recent earnings, the company said it would also look to sell its development arm, shifting its focus to making modules. The company's shift to focus on panel production means two of its biggest North America-based public competitors are SunPower (SPWR) in the residential space and Canadian Solar (CSIQ -1.22%)on commercial-scale projects.
First Solar has been busy ramping up production of Series 6 thin-film solar cells made of the semiconductor cadmium telluride (CdTe). The modules have reached a top production level of 435 watts, beating SunPower's newest modules, which can get to 400 watts, and Canadian Solar's new modules, which can reach 410 watts.
The increased wattage is important but not enough to constitute a clear competitive advantage on its own. More important for First Solar is the modules' increasing efficiency and lower manufacturing cost versus silicon. Canadian Solar has focused a great deal of development on improving solar output on bifacial modules, which generate power from both the front and the back to increase power output and decrease the cost of electricity.
But on First Solar's most recent earnings conference call, CEO Mark Widmar highlighted the necessity of improving efficiency along with capacity as contracted prices decline on power purchase agreements [PPA] that provide the contractual backing for project development. "While the potential energy advantages of bifacial modules are often touted, the increased costs are often overlooked," Widmar said. "As PPA and merchant energy prices continue to decline, the ability to increase energy output with little to no increase cost is critically important."
First Solar was also able to quantify its module improvement on the call. Megawatts produced per day were up by 152% year over year in 2019 based on operational improvements, Widmar said. He added that capacity utilization adjusted for plant downtime increased 26 percentage points to 100%, production yield was up 32 percentage points to 94%, and average watts per module increased 20 watts.
In terms of competitors in other regions of the world, a recent research report from Cowen projected that if the Series 6 modules meet targets on technology and cost, then First Solar should have a "permanent cost advantage in both module and system cost" versus Asian-based peers. "Notably, Series 6 is anticipated to have a 40% cost reduction versus Series 4, which should drive costs below $0.20/w over time versus Asian peers in the low to mid $0.20/w range," Cowen said.
Is the advantage enough to make the company a buy?
First Solar is a viable investment option in the renewable energy space and distinguishes itself from competitors beyond the benefits of its modules. The company has very low debt, strong cash flow, and a healthy balance sheet that positions it to withstand the cyclical nature of the business.
First Solar is also larger in terms of market capitalization, at roughly $4.3 billion versus $1.1 billion and $1.2 billion for SunPower and Canadian Solar, respectively. The company represents a compelling opportunity now, particularly as it narrows its focus, and its new modules book sales. The new Series 6 modules are seeing healthy early demand and are sold out through the end of the year. Investors would be wise to keep First Solar on the radar to see if the technological advantages of its modules translate into improved profitability over the next few quarters.
