Up 33% This Year, Would A Change In Washington Derail First Solar Stock’s Rally?

First Solar stock (NASDAQ:FSLR) has had a solid year, rising by about 33% year-to-date. In comparison, Enphase Energy stock (NASDAQ:ENPH), another solar component player, has seen its stock decline by 18% over the same period. First Solar stock has been benefiting from several factors.

First Solar’s financial performance has been solid in recent quarters.  First Solar’s revenues rose by 45% year-over-year in Q1 2024, while net profit margins also surged to over 28%, up from roughly 8% in the year-ago period. While profits are driven in part by regulatory tailwinds and easing supply chain constraints, First Solar’s more efficient thin-film solar panels and its focus on large-scale solar projects are also likely to help the company as volumes ramp up. Demand for solar has remained strong with the company recording about 2.7 gigawatts of bookings from January through early May, taking its total bookings backlog to 78.3 GW giving the company considerable demand visibility.

The current regulatory environment is also very favorable for U.S.-based solar manufacturers such as First Solar.  The Biden Administration recently increased tariffs on solar cells imported from China from 25% to 50%. This should prevent dumping by the Chinese, given that there is a massive capacity glut in China, with the country’s solar panel production capacity estimated to stand at more than 2x global solar demand in 2023. Separately, First Solar is also benefiting from the Section 45X tax credit under the U.S. Inflation Reduction Act, given that it has been doing an increasing mix of its manufacturing in the U.S. For perspective, toward the end of December 2023, the company announced that it had signed agreements for the sale of up to $700 million in 2023 tax credits it earned under the act. The company is likely to realize $1.0 billion to $1.05 billion of Section 45X tax credits this year as well, adding directly to its operating profits.

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. The Federal Reserve is considering reducing interest rates in 2024. This should bode well for renewable energy stocks, by making financing of large-scale projects more affordable. First Solar is emerging as one of the big beneficiaries of the U.S. efforts to encourage domestic renewables production given its vertically integrated manufacturing. That said, there are risks as well. A meaningful part of First Solar’s strong financial performance can be attributed to the Inflation Reduction Act and these tailwinds are likely to eventually ease. Moreover, the upcoming U.S. Presidential and Congressional elections due later in 2024 could prove a risk for the company.  Inflation Reduction Act-related tax credits could be modified if Republicans, who typically favor a market-based approach over subsidies for renewables – take control of the White House and Congress. Donald Trump holds a 2.3-point lead versus Joe Biden, according to polling averages from FiveThirtyEight. That said we remain neutral on First Solar stock, with a $235 price estimate, which is roughly in line with the current market price. See our analysis of First Solar Valuation: Expensive or Cheap for more details.

[1] Returns as of 7/11/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios