First Solar

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

First Solar is a global provider of photovoltaic (PV) solar energy solutions, known for its thin-film module technology, manufacturing, and project development expertise.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Analysis: First Solar (FSLR) exhibits a moderate moat, scoring a 3 out of 5. This rating is underpinned by several factors but also faces some significant vulnerabilities:

Technology and Manufacturing Expertise: FSLR holds a unique position in the solar industry through its thin-film Cadmium Telluride (CdTe) technology. The manufacturing process is significantly different from traditional polysilicon solar panels, and this technological differentiation provides a key moat element. They have also built a large scale operation and have been improving their process. However, this advantage has become less pronounced over the recent years, as other producers have developed and improved their own technology, and efficiency of crystalline-silicon modules is now often higher and can be produced at a lower cost.
Vertically Integrated Manufacturing: FSLR is somewhat vertically integrated in that it controls the manufacturing process from raw materials to modules, and have invested in facilities and recycling capabilities. This reduces reliance on external suppliers, mitigates supply chain risks, which is more important in today’s world. This is more of a positive in recent years but didn’t offer a great advantage in previous years since raw materials were in abundance and cheaper and could be procured by all companies easily.
Established Relationships: With its history in large scale project development, First Solar has built long lasting relationships with developers and the power market. As such, there are some switching costs for the buyers of FSLR products, and buyers are more willing to work with FSLR due to their existing relationship. However, it is not a strong lock-in since they do compete with other companies for projects.

Scale and Efficiency: First Solar has become one of the largest module manufacturer outside of China. Scale advantages do make it harder for new companies to compete. They have also developed economies of scale in the production and distribution process.
Barriers to Entry are Fading: While there are high technological barriers to enter this business, this is rapidly changing. With time, many other players have emerged or are emerging and have developed superior technology that may displace or decrease the dominance of FSLR. Their technology has to continue to evolve to compete with emerging competitors.
Intangible Assets are Losing Edge: While having their unique technology was an intangible asset, it is slowly losing its advantage. Many manufacturers are making modules with lower costs and higher efficiencies.

Legitimate Risks:

Technological Obsolescence: The solar industry is rapidly evolving, and there’s a risk that FSLR’s current technology may become outdated, leading to competitive disadvantages. Other technologies, like PERC, TOPCon, and more advanced crystalline-silicon modules, offer higher efficiencies and have been shown to decrease prices and increase scale. FSLR’s modules may not have the same performance as new modules, and other manufacturers could compete on price due to their scale.
Commodity Risk: The cost of inputs for solar modules such as glass, aluminum, silicon, silver, and polysilicon can fluctuate wildly and hurt their production costs. For example, if their inputs become extremely expensive, it will make their end products expensive and lose their pricing advantage against competitors.
Competition and Pricing Pressure: The solar industry is characterized by intense competition. If supply increases rapidly and demand doesn’t keep pace, prices will come down, which in turn may lead to lower margins for everyone. It also means that FSLR may lose sales due to competitors who are pricing lower. The market share has been shifting in this industry, making it important to evaluate how sustainable their moat is.
Project Execution Risks: FSLR’s project development is a significant part of the revenue and can present challenges. They need to have strong project management capabilities and also build relationships with the customer.
Regulatory Changes: Government policies or changes in tax policy, or tariffs may affect their ability to perform well and give disadvantages in various markets.
Supply Chain Disruption: The supply chain has become extremely fragile and with recent geopolitical events or economic crises, supply chains can be under pressure.

Business Resilience:

Strong Financial Position: Their cash position will help them tide through a recession or a difficult economic period.
Technological Leadership: FSLR has historically been a leader in thin-film solar technology, which gives some credibility as they have a history of innovation. If there are problems, they should be able to leverage this experience to adapt to other technologies.
Strategic Partnerships: As FSLR is in the forefront of new technologies, the ability to form strategic partnerships with other companies will help them grow at scale.

Business Explanation:

Revenue Distribution:

FSLR generates revenue through three primary business segments: (1) the sale of solar modules, (2) project development, and (3) provision of operations and maintenance services. Their projects revenues are tied to the sale and installation of large scale projects.

Industry Trends: The solar energy industry is undergoing rapid expansion. Demand for solar PV is being driven by government policies, lower costs for solar modules, technological advancements, and increasing awareness about renewable energy sources. There is also growing competition and consolidation in the industry.
Margins: The margin of FSLR has been fluctuating due to its own issues, but has lately shown improvements. Since they are going for high end solar plants, the margin has been above average in some quarters.
Competitive Landscape: FSLR faces competition from a variety of players, including Chinese PV module manufacturers, diversified energy companies, and project developers. China in particular has become a major force with large, vertically integrated companies that have huge capacity.
What Makes FSLR Different: They mainly have the following advantages: (1) They are an established and reputed solar company, (2) They have unique Cadmium Telluride technology which has slightly lower carbon footprint, (3) They have a very large manufacturing capacity, and (4) They have expertise in both PV module production and project execution.

Recent Concerns/Controversies The company has been dealing with issues in their financial position and operating metrics, due to high inflation, increasing material costs, and high logistics costs. They have also changed the product design for their manufacturing and are ramping up the production of the new models, which has also led to some delays. There were also some investigations on the use of forced labour which may impact future prospects. Their stock prices has been volatile. During the latest earnings call, management has indicated that they are on track to manage these issues in a way that should make them profitable in the coming year, and have revised their sales targets upwards based on increasing demand for their products. But, the road ahead is still uncertain. They have increased their capital expenditure and will have to show how they make progress with all of these.

Financials The financials of FSLR have seen many changes recently, so I will give most importance to the last report.

Balance Sheet: They have a good cash balance of $1.27 billion with total assets over $8.1 billion. Total liabilities are roughly 3.5 billion, and this shows that the financial position of the company is stable. They have been increasing their manufacturing capacity with substantial capital expenditure which will increase their assets over time.
Profitability: Their profitability has been fluctuating over time. Their gross margin has increased from 10.6% in 2020 to 28% in 2022 but went down to 15.5 % during the last three months of 2022. This is mainly because of higher cost of operations. Their net income has also changed a lot over these periods from $550 million to $100 million, and have struggled to improve profit margins. This variability makes FSLR more risky. But during the latest quarter, they have shown good profit numbers with operating income at $461 million.
Cash Flow: The operating cash flow has been fluctuating greatly. Even with strong profitability in the recent quarter, their cash flow from operating activities has been negative in the last three years. This is likely because they are using their cash to fund new factories or pay for raw materials. The company’s overall free cash flow was -$451 million, while their cash from operations was -$244 million. They are relying on debt to fund the growth of their business, and it remains to be seen how this will impact the value of the company.

Understandability: 2 / 5. The core concept of producing solar panels using a different material than its competitors is easy to understand. However, the complexities in the production process, financial statements, and industry dynamics makes it a bit harder to understand completely. Their vertical integration is also an important part to understand the complexities of this business. The business also uses complex financial instruments to balance currency and interest risks, which makes it hard for many investors to accurately understand the company.

Balance Sheet Health: 4 / 5. Overall FSLR has good balance sheet health with good amount of cash. Their equity is roughly twice their debt and also they have good liquidity. However, one should also be aware that they are using their cash to build new factories and are financing the rest with debt. They also have a lot of deferred tax liabilities which may be hard to predict. The main problems for the company are to get the operations going so it can consistently generate free cash flow. But, their balance sheet is healthy enough to tide over temporary problems.