First Solar (FSLR -0.59%) has been one of only a few success stories in the solar industry over the past decade. The company maintained a relatively strong position despite fierce competition from Chinese commodity solar panel manufacturers, and remained profitable for most of that time. More recently, it has been a huge beneficiary of subsidies related to the Inflation Reduction Act.
However, the landscape is changing for First Solar. Not only is the next administration less friendly to renewable energy subsidies, but the initial benefit of those subsidies may be declining. Is the stock still a great buy, or is the best behind for investors?
First Solar's growth and subsidy story
Over the past five years, First Solar stock is up an incredible 255%, but the company's performance doesn't tell the same growth story.
FSLR Revenue (TTM) data by YCharts.
Part of the opportunity investors see is in building facilities after years of stagnation. Plants opened in Ohio and Alabama this year, and management expects one more to open in Louisiana in 2025. Between 2023 and 2026, management expects to increase production from 16.6 gigawatts (GW) to 25.2 GW, mostly in the U.S.
But why does it make sense to build plants in the U.S.? In 2024, First Solar expects a $1.02 billion to $1.05 billion benefit from Section 45X tax credits, which is over half of the company's expected gross profit of $1.95 billion to $2 billion.
Take the subsidies away, and operating income would fall by more than two-thirds. The reality today is that First Solar's current level of profitability wouldn't last if those subsidies had gone away.
Is there a demand problem?
Subsidies for both manufacturing and deployment drove a boom in demand in 2023. Management said the expected backlog increased from 61.4 GW at the end of 2022 to 80.1 GW on Feb. 27, 2024.
But the backlog as of Oct. 29, 2024, is down to 73.3 GW. Instead of increasing demand, developers are pulling back at a time when energy demand is surging, particularly in data centers that have often been a demand source for solar energy.
This could be because development has shifted to commodity panels, or it could be developers pulling back as interest rates rose. For a variety of reasons, demand seems to have pulled back just as First Solar's production is ramping up.
The balance sheet and value of First Solar
At the end of 2024, management expects to maintain a net cash balance of $500 million to $700 million, even after a massive buildout of manufacturing plants.
That's a great balance sheet, but the value of First Solar's stock isn't what it once was. The market cap is now $20.6 billion, and the current price-to-earnings multiple based on 2024 guidance is 59 times. That's a high price to pay for a slow-growth stock.
First Solar can be one of the best companies in the solar industry and still be too expensive to buy today. Not only do I think this is no longer a stock to buy, it's a great time to be a seller of First Solar, given its stock price.
