Trump Presidency: Risk or Non-Issue For First Solar?

First Solar stock (NASDAQ:FSLR) has fared much better than its sector peers, rising by about 13% year-to-date. In comparison, Enphase Energy stock (NASDAQ:ENPH), another solar component player, has seen its stock decline by 38% over the same period. As the U.S. approaches the presidential election on November 5, there could be an air of uncertainty for the solar industry. A Democratic win would likely extend the pro-renewable policies of the Biden administration, but betting markets are signaling a growing possibility that Republican candidate Donald Trump could win. Trump has generally favored a market-based approach to renewables as opposed to subsidies, which could create a less favorable regulatory environment for renewable energy companies.

To be sure, the solar industry at large should continue to expand irrespective of who runs the government, as continuous cost declines have made solar an increasingly viable energy source.  However, a meaningful part of First Solar’s strong financial performance (and stock price appreciation) can be attributed to a favorable regulatory environment under Biden. Could a shift in government threaten this momentum and impact the stock?

The increase in FSLR stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -12% in 2021, 72% in 2022, and 15% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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?

First Solar’s financial performance has been pretty good in recent quarters.  Revenues rose 24% year-over-year in the first nine months of 2024, while net profit margins also surged to 33%, up from roughly 22% in the year-ago period.  Now a decent part of First Solar’s improving performance is attributable to First Solar’s improving operating performance and technology. The company’s focus on more efficient thin-film solar panels and large-scale solar projects is giving it better scale and differentiation versus rivals. Production has also scaled up nicely. Panel production stood at a record 3.8 gigawatts (GW) in Q3 2024, and this trend is likely to continue.  Demand for solar has remained strong with the company recording about 4 gigawatts of bookings year-to-date, taking First Solar’s bookings backlog to 73.3 GW. This gives the company considerable demand visibility.

However, the bulk of First Solar’s margin expansion is coming from subsidies, specifically the Section 45X tax credit under the U.S. Inflation Reduction Act, which incentivizes panel manufacturing in the U.S. First Solar has doubled down on its U.S. production and plans to open its fifth factory in the U.S. by 2026 in Louisiana, taking its total U.S. capacity to about 14 GW. The tax credits the company is gaining from doing a larger mix of module sales from the U.S. are sizable. 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. This has helped the company’s bottom line considerably. For example, gross margins stood at 50% in Q3 2024 compared to levels of under 40% in 2023.

Now if these credits are lost there could be a considerable setback for First Solar. But how likely is it that incentives under the Inflation Reduction Act would be at risk under a Trump presidency? Subsidies such as the $7,500 credit on electric vehicles would very likely be done away with, and Trump also indicated that he would rescind unspent funds from the Inflation Reduction Act (IRA). However, the Section 45X tax credit that First Solar is currently the biggest beneficiary of – could be on firmer ground. Why is that? Trump has been advocating for increased U.S. manufacturing and has committed to bringing manufacturing jobs back to the U.S. He also aims to protect domestic manufacturers through tariffs on foreign goods while also cutting corporate taxes and easing regulations, which could benefit First Solar. Currently, there is a 50% tariff on photovoltaic solar cells imported from China, helping shield U.S. manufacturers from foreign competition. Trump’s pro-U.S. manufacturing stance could lead to further protections that would favor companies like First Solar.

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. In September, the Federal Reserve also cut interest rates for the first time in almost four years. This should bode well for renewable energy stocks, by making financing of large-scale projects more affordable.  We have a $204 price estimate for First Solar, 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 11/1/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios