Up A Mere 15% In 2023, Is First Solar Stock Poised To Do Better In 2024?

First Solar (NASDAQ:FSLR) had a relatively mixed 2023. While the stock gained about 15% over the year, it has underperformed the broader S&P 500, which remains up by 24% for the year. Renewable energy stocks in general have been hurt by rising interest rates, which have made project financing more expensive leading to some cooling in demand. Moreover, Nextera Energy, one of the largest renewable electricity producers in the U.S., lowered the growth rate target for its subsidiary NextEra Energy Partners from between 12% and 15% to between 5% and 8% until 2026, sparking concerns among investors in the renewables sector.  First Solar also posted a mixed set of Q3 2023 results. While earnings beat estimates coming in at $2.50 per share, revenue fell short, rising by about 27% versus last year to $801 million.

Looking over a longer period, FSLR stock has seen extremely strong gains of 70% from levels of $100 in early January 2021 to around $170 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in FSLR stock has been far from consistent. Returns for the stock were -12% in 2021, 72% in 2022, and 15% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 (YTD) – indicating that FSLR underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FSLR face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Overall, we think that there are multiple long-term positives for the solar sector at large and First Solar in particular. Things are getting better on the macro front. Inflation has cooled off considerably, declining to 3.1% for November, approaching the Federal Reserve’s 2% target rate. The Federal Reserve also indicated in its most recent meeting that it was considering possibly reducing interest rates up to three times during 2024. This should bode well for renewable energy stocks.  The sector should also see a meaningful tailwind from the Inflation Reduction Act signed into law in August 2022, which carries about $370 billion in subsidies and tax credits for clean energy investment. First Solar will emerge as one of the big beneficiaries of the U.S. efforts to encourage domestic renewables production given its vertically integrated manufacturing. Last week, the company said that it plans to sell up to $700 million in tax credits it accumulated through the sale of solar modules this year to payments firm Fiserv.

Moreover, supply chain snags that hit most industries have also been easing and this could eventually help improve supply and margins for solar manufacturers. First Solar projects that its gross margins could rise from levels of about 20% currently to 30% over the next three years, excluding the benefits of the Inflation Reduction Act, driven by lower cost per watt of its panels and strong average selling prices. Due to its largely fixed operation cost structure, operating margins will grow from 10% to 24% over the next three years. The company also has considerable revenue visibility, with a bookings backlog of 81.8 gigawatts (GW) extending through 2030. There also remains a long runway for the uptake of solar as an energy source. A 2021 study by the Energy Department indicated that solar could account for 40% of U.S. electricity generation by 2035, up from less than 5% in 2022. This could drive growth in the longer term. We remain positive on First Solar stock, with a $211 price estimate, about 50% ahead of the market price. See our analysis of First Solar Valuation: Expensive or Cheap for more details.

[1] Month-to-date and year-to-date as of 12/30/2023
[2] Cumulative total returns since the end of 2016

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