Like the sun, First Solar, Inc. (NASDAQ:FSLR) has a history of rising and setting.
Eighteen months removed from its 2006 IPO, the volatile solar energy stock was up almost 1,200%. Four years later, it was down more than 96% — and trading below its initial offering.
The latest mega-swing came last week after First Solar announced an $80 million acquisition of Swedish solar technology group Evolar AB. On top of a favorable tax law development, this jettisoned the stock to a 30% weekly gain. It is now trading at its highest level since 2008.
The takeover news came two weeks after First Solar released disappointing first quarter numbers. Revenue grew 49% to $548 million but was well short of the consensus estimate. The company returned to profitability but EPS missed by a mile.
For now though, the market is looking past the near-term financial results. Suddenly, an astute buyout and positive regulatory news have First Solar shining again.
Why Is First Solar Buying Evolar AB?
Evolar AB has only been around for four years but has made great strides in the solar industry. It has successfully developed a solution for commercializing a tandem technology that uses perovskite thin films. Perovskite solar cells are said to have an advantage over silicon-based cells because they require simpler, less costly processing and are less prone to internal defects. Evolar holds multiple world records for thin film efficiency.
As a maker of next-generation solar power systems, First Solar finds Evolar’s tech-forward innovations to be a good fit. The addition is expected to bolster First Solar’s competitive position in the thin film photovoltaics (PV) space.
Interest in solar energy solutions has grown in recent years from both consumers and businesses. In turn, competition has heated up. In addition to battling peers like Tesla Solar, SunPower and Canadian Solar, First Solar is facing a wave of challengers with new technologies, including Enphase Energy, SolarEdge Technologies and Array Technologies. For First Solar, Evolar represents a valuable asset in an intensifying solar industry arms race.
Why Do Recent Tax Law Changes Benefit First Solar?
On May 12th, the U.S. Treasury Department provided an update on Inflation Reduction Act (IRA) guidance that also improves First Solar’s competition position. The new domestic content guidance defined a U.S.-manufactured solar product as one that uses 1) exclusively U.S. manufacturing processes and 2) components that are all of U.S. origin.
Solar companies that meet these requirements stand to benefit from an additional 10% tax break. The law holds the potential to not only drive down solar energy prices for customers but also help U.S. solar leaders fend off overseas competition especially from China.
The tax law change is expected to incentivize First Solar and other domestic solar panel manufacturers to increase their U.S. production capacity. The company is targeting 20 gigawatts of capacity by 2025. In conjunction with this goal, it recently announced the construction of a $370 million R&D facility in Perrysburg, Ohio that will include a high-tech manufacturing line for thin film and tandem PV modules.
Will First Solar Stock Keep Rising?
First Solar’s development of next-gen solar technologies is undoubtedly having a positive impact on global climate change. Whether or not its stock can continue to have a positive impact on investor portfolios is another question.
Having tripled over the past 12 months, First Solar is arguably stretched. On the daily chart, the relative strength indicator (RSI) is above the key 70 level which, along with other technical indicators, suggests overbought conditions.
On the other hand, Friday’s trading volume was huge. Nearly 24 million shares, nine-times above normal, means many bulls are on board — and could be in control for months to come.
In terms of valuation, First Solar’s P/E ratio looks absurd from a trailing earnings basis at 594x. But based on what analysts are anticipating for EPS this year, it is a far more palatable 32x. If management can meet or exceed heightened profit expectations, this could cause the P/E multiple to expand. Note: the broader tech sector in which First Solar resides has an average P/E ratio of 36x.
Wall Street opinions of First Solar stock have been mixed since the Q1 earnings release but have yet to reflect Friday’s one-two news punch. After analysts had the weekend to digest the Evolar and tax law news, First Solar ratings and target prices could brighten significantly.