First Solar: A Solar Surge, Made in the USA, and the Path to Net Zero (NASDAQ: FSLR)

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Solar First (NASDAQ: FSLR) is reaching new highs as the market becomes increasingly aware of the rise in large-scale solar deployments in the US. This is in the wake of an energy crisis and an Inflation Reduction Act revitalized momentum towards net zero. The Tempe, Arizona-based company recently released its fiscal 2022 third quarter, which showed double losses in revenue and profit, but nonetheless sent its share price soaring to an 11-year high.

The company has been able to capitalize on the IRA’s local content requirements to generate new orders. Essentially, new utility-scale solar projects are eligible for a 10% local content credit if any manufactured product that is a component of your project was produced in the United States. This fueled continued demand for First Solar’s US-made thin-film solar panels, whose technology uses cadmium and telluride to provide advantages over conventional options like crystalline silicon. This means panels that are not only highly recyclable at the end of their useful life, but have a higher theoretical efficiency limit.

Critically, Made in the USA now forms a material part of First Solar’s long-term bull case, as the IRA is poised to radically transform the green energy landscape over the next decade. First Solar is the largest solar manufacturing company in the US and is in the midst of this great lightning bolt of change as the controversial Local content tax credits may boost the company’s pricing power with buoyant demand meaning it will sell until 2026.

A Solar Surge, Made in the USA

The company’s recent earnings report for the third quarter of fiscal 2022 recorded revenue of $628.93 million, an increase of 7.8% from the prior year quarter, but a loss of $119 million on estimates. of consensus. This was due to 16.6 GW of new bookings during the quarter with a base average sales price of $0.316 per watt. Year-to-date bookings stood at 43.7 GW and the total future delivery backlog rose to a record 58.1 GW. This includes an agreement to supply Swift Current, a large-scale solar power developer, with 2 GW of thin-film solar modules in 2025 and 2026.

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The company manufactured 26.6 MW per day as the upgrade of its Ohio manufacturing plant continues on schedule. First Solar is investing $185 million to expand production capacity by 0.9 GW for a cumulative annual production capacity of more than 7 GW by 2025. Negative EPS GAAP of $0.46 was a loss of $0.28 in consensus estimates and a positive EPS deterioration of $0.43 for the year. – Trimester ago. Bears have pointed to this and the company’s low gross margins as reasons for concern.

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Low single-digit gross profit margin of 3% for the quarter meant a gross profit of just $20.98 million. This was a drop from the figure a year ago and came with gross profit guidance of between $75 million and $110 million for the full fiscal year. This was a downward revision of previous guidance to bring gross profit to between $115 million and $165 million. Net sales for the full fiscal year were also revised down to between $2.6 billion and $2.7 billion from the previous limit of $2.8 billion.

The company’s cash position stood at $1.9 billion at the end of the quarter, but management emphasized the need to raise more capital for its expansion needs with a new 3.5 GW facility planned for the US. and continued international expansion in the offing. The most obvious option would be a share offering with its common shares trading at a significant premium to the 10-year average.

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This premium has created a significant level of risk for shareholders, as a pullback is very likely against a market that is still tired of generally unprofitable companies in high-growth industries.

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The path to net zero

First Solar’s rally is unique against a risk-off environment that has already sent valuations crashing across the board for its peers, but the enthusiasm is understandable. The IRA represents an 800-pound gorilla ready to further bolster its industry already experiencing long-term structural growth. Local content requirements will flood First Solar with orders and enhance its pricing power without another Made in USA company of its scale.

The company has been a big winner in the historic growth of large-scale solar power. This will now experience a huge bang in the next decade as national governments around the world make clean energy a critical component of their post-pandemic economic recoveries and as part of their long-term response to the current energy crisis. . But it’s hard to recommend the company as a buy given its recent surge and earnings that were lackluster at best. So while the push toward net zero through clean, renewable solar power is accelerating, the near-term outlook for First Solar is likely to be dim.

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