Clean Energy Sector Tracking: Why Has First Solar's Stock Been on A Continuous Rise?

First Solar has surpassed China's Sungrow to become the world's largest photovoltaic manufacturer by market value, marking the first time since 2018 that a U.S. manufacturer has reached the peak of market value. Reports from UBS and Goldman Sachs have previously stated that First Solar is "an overlooked direct beneficiary" of electricity demand growth. First Solar's unique technology is particularly suited to the current two largest structural themes: the growth in electricity demand driven by AI and the increasing protectionism in the U.S.

First Solar's earnings grow rapidly. In 2022, First Solar reported a loss of $44.2 million, but by 2023, its profits soared to $830 million. In the first quarter of 2024, its revenue and profits continued to increase rapidly. Q1 revenue increased by 45% to $794 million, and net profit grew by 4.6 times, recording a profit of $240 million for the single quarter.

By the end of 2023, First Solar's backlog of orders had reached 78.3GW. In the first two months of 2024, its orders increased by another 1.8GW, bringing the total to 80.1GW. Given First Solar's current capacity, it would take three to four years to fulfill these orders.

To meet robust demand, First Solar is ramping up production. Since 2020, First Solar has invested $4.1 billion in expansion, increasing its capacity from 6GW to 16GW by the end of 2023 and is expected to achieve 26GW by 2026. According to the company's plans, by the end of 2024, First Solar's domestic capacity in the U.S. will account for 50%, and by 2026, it will exceed 55%.

The International Energy Agency estimates that by 2026, the total electricity consumption of global data centers will increase from about 460 terawatt-hours in 2022 to at least 1,000 terawatt-hours. A research report released earlier this week by Goldman Sachs forecasts that by the end of 2030, AI will drive a 160% increase in data center electricity demand. To support AI data centers alone, U.S. electric utilities are expected to invest about $50 billion in new generation capacity. This has been an important driver of the continuous surge in the shares of First Solar.

According to the Institute for Energy Research (IER) in the U.S., under the framework of the "Inflation Reduction Act," First Solar is expected to receive about one billion dollars in government subsidies each year for the next ten years; in 2023, the subsidies First Solar received even accounted for up to 90% of its profits. Under the current subsidy policy, First Solar could get subsidies and tax reliefs at all stages, amounting to 17 cents per watt. Without subsidies, First Solar's gross margins for 2024 to 2026 could be: 20%-22%/25%-27%/28%-30%. With subsidies, the gross margins for these three years would become 44%-46%/53%-55%/60%-62%, nearly doubling.

Components from Southeast Asia have long accounted for 80% of U.S. solar panel imports. According to InfoLink, the cost of components from Southeast Asian manufacturers is only about 3 cents per watt lower than that of U.S. domestic manufacturers. If the U.S. imposes tariffs on Southeast Asian solar products, the cost advantage of Southeast Asian manufacturers would be lost.

On May 14th, the import tariff on photovoltaic cells was raised from 25% to 50%. On May 15th, the Commerce Department initiated anti-dumping and countervailing duty investigations on photovoltaic cell components from four Southeast Asian countries. On May 16th, the White House issued a notice formally ending the tariff exemption for bifacial solar panels, and the exemption policy for Southeast Asian solar products is scheduled to end on June 6th of this year. Tariff barriers may allow First Solar to gain more market share and continue to reduce costs through scale expansion.

The company bets on cadmium telluride (CdTe) technology, which has different application scenarios than the crystalline silicon route used in China, and does not constitute direct competition. Low-temperature coefficient, low degradation rate, and increased bifacial rate bring additional power generation advantages. According to First Solar, CdTe modules retain >89% of original performance after 30 years. In terms of technical indicators such as bifacial rate, thin-film batteries are also starting to break through past bottlenecks, gradually approaching crystalline silicon batteries. It's noteworthy that CdTe panels' energy conversion efficiency is generally lower than that of crystalline silicon-based solar cells, which means more surface area is required to generate the same amount of electricity. Still, the energy payback time for CdTe panels is relatively low.

The U.S. Department of Energy specifically pointed out in its "Solar Photovoltaic Supply Chain Assessment" that cadmium telluride (CdTe) technology is an opportunity to "expand domestic solar panel production" and has begun to tailor subsidy policies for cadmium telluride technology.

In addition to cadmium telluride, First Solar invested heavily in acquiring a perovskite company called Evolar on May 16, 2023. The company has increased photovoltaic efficiency to 25% without additional costs. The technical features of perovskite allow it to be deeply integrated with the thin-film technology that First Solar has already mastered.

Bloomberg analyst Rob Barnett noted that the company's ebitda appears set to expand in 2024, with margin exceeding 35%, based on the latest scenario analysis, which accounts for manufacturing subsidies and favorable prices that are locked in.

JPMorgan raised the firm's price target on First Solar to $262 from $240 and keeps an Overweight rating on the shares. JPMorgan continues to believe that utility-scale solar has the highest level of demand, although it says macro factors are impacting project timing while increasing geopolitical developments present risks. As of Tuesday, First Solar's closing price was $280.16, exceeding the company's target price.