With Its Stock Outperforming, Is First Solar Set For Another Strong Quarter

First Solar stock (NASDAQ:FSLR) has had a solid year, rising by about 28% year-to-date. In comparison, Enphase Energy stock (NASDAQ:ENPH), another solar component player, has seen its stock decline by 21% over the same period. Now, First Solar is slated to report its Q2 2024 results toward the end of this month. We expect earnings to come in at $2.71 per share, up from $1.59 in the year-ago period, while revenues are likely to come in at about $954 million, a growth of about 18% compared to last year. Both metrics are likely to be marginally ahead of the consensus estimates. So what are some of the trends that are likely to drive First Solar’s earnings for the quarter?

First Solar’s financial performance has been solid in recent quarters.  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. Over Q1, the company saw record quarterly panel production totaling 3.6 gigawatts, and this trend is likely to continue.  Demand for solar has remained strong with the company recording about 2.7 gigawatts of bookings from January through early May, taking First Solar’s bookings backlog to 78.3 GW giving the company considerable demand visibility.

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 profits. For instance,  gross margins stood at 44% in the first quarter compared to 20% in Q1 2023. This increase was primarily driven by a larger mix of modules sold from the company’s U.S. factories, which qualify for Section 45X tax credits. We should see margins remain elevated over Q2 as well.

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 (and stock price appreciation) 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.  We remain neutral on First Solar stock, with a $235 price estimate, which is marginally ahead of the current market price. See our analysis of First Solar Valuation: Expensive or Cheap for more details.

[1] Returns as of 7/23/2024
[2] Cumulative total returns since the end of 2016

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