An earnings miss and fundamental changes in U.S. government policies have driven down First Solar stock to a level where it now appears to be a value opportunity! This is a company that posted over 26% growth in the past year, maintains operating and net margins above 30%, has minimal leverage with a debt-to-equity ratio of roughly 0.05, and boasts an operational cash flow margin nearing 30%—yet its stock trades at a PE ratio slightly above 10. That seems inconsistent, doesn’t it?
Even fundamentally strong stocks can decline when market sentiment turns negative. To mitigate company-specific risks while still capitalizing on growth, consider exploring the High-Quality portfolio, which has significantly outperformed the S&P 500, delivering returns of over 91% since its inception.
Why Are Investors Spooked?
First Solar has projected FY 2025 operating income between $1.95 billion and $2.30 billion, factoring in expected benefits from the Inflation Reduction Act (IRA). Notably, production credits are anticipated to contribute $1.65 billion to $1.7 billion, emphasizing how critical government subsidies are to the company’s profitability. However, the new administration’s intention to ease climate regulations and back the fossil fuel sector raises concerns.
Furthermore, the company faces increasing competition from Chinese firms. While First Solar generates strong operational cash flow (exceeding $1.2 billion in the past year), its high capital expenditure (above $1.5 billion) renders its free cash flow negative. The combination of high fixed investment and policy uncertainty presents a challenging scenario.
The Bright Side: A Value Buy
Here are some reasons why First Solar could be a solid long-term value investment:
- FSLR demonstrates stronger fundamentals compared to peers like Enphase Energy, Sunrun, and Solaredge Technologies
- Highest 3-year average growth exceeding 14%
- Top operating margin at 33%
- Significantly undervalued versus Enphase Energy, with a PE ratio just over 10 and PS ratio of 3.2, compared to 80 and 6.2, respectively, for Enphase
- Despite elevated capex, FSLR has minimal leverage with less than $1 billion in debt against a market capitalization of nearly $14 billion, indicating it is largely funding its investments through internal cash flows.
- Strong positioning amid tariff tensions: Domestic production and supply chains reduce exposure to external disruptions and may provide a strategic advantage under the new administration’s pro-domestic manufacturing stance.
Regulatory risk is just one component of the comprehensive risk assessment framework we apply in building the TrefisHigh Quality Portfolio. With 30 handpicked stocks, this portfolio has consistently outperformed the S&P 500 over the past four years. Why is that? Because the HQ Portfolio is constructed for better returns with lower volatility, avoiding wild market swings—backed by strong performance indicators found in our HQ Portfolio performance metrics.
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