First Solar Outshines Rivals Amid Regulatory Uncertainty

First Solar stock (NASDAQ:FSLR) has outperformed its industry competitors, showing an increase of approximately 13% year-to-date. In contrast, Enphase Energy stock (NASDAQ:ENPH), another player in the solar market, has dropped by 38% during the same timeframe. As the U.S. prepares for the presidential election on November 5, concerns linger over the future for the solar industry. A win for the Democrats might mean the continuation of Biden’s pro-renewable policies, yet betting markets hint at a potential Republican victory by Donald Trump. Trump’s approach typically favors a market-driven strategy for renewables, rather than direct subsidies, which could create challenges for the renewable energy sector.

The overall solar market is expected to grow, regardless of the election outcome, as costs continue to fall, making solar energy more viable. However, a significant portion of First Solar’s recent successes—and stock price increases—can be linked to favorable regulations under the Biden administration. The question persists: could a shift in government jeopardize this momentum and impact stock performance?

First Solar’s stock has experienced fluctuating returns over the past four years, proving to be more volatile than the S&P 500. For instance, in 2021, the stock saw a decline of 12%, followed by impressive gains of 72% in 2022, and a more moderate increase of 15% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, which includes 30 selected stocks, has shown less volatility and has outperformed the S&P 500 each year within that period. This contrast begs the question: what accounts for this remarkable performance difference? The HQ Portfolio generally yields better returns with lower risk, creating a less uncertain investment climate than First Solar’s shares. Given the current economic challenges—including interest rate changes and international conflicts—could First Solar encounter a repeat of its previous underperformance compared to the S&P over the next year, or will it continue to thrive?

First Solar’s financials have shown positive trends in recent quarters. Revenue surged by 24% year-over-year in the first nine months of 2024, while net profit margins improved significantly to 33%, compared to about 22% last year. This success has been driven by the company’s advancing operations and technology, particularly its efficient thin-film solar panels and large-scale projects, enhancing its competitive edge. In Q3 2024, production levels reached a record 3.8 gigawatts (GW), and demand remains robust, with approximately 4 GW of bookings this year, pushing First Solar’s backlog to 73.3 GW.

However, much of First Solar’s margin growth stems from subsidies, particularly the Section 45X tax credit under the U.S. Inflation Reduction Act, which encourages U.S. manufacturing of solar panels. The company is expanding its American production capabilities, planning to open a fifth factory in Louisiana by 2026, bringing its total U.S. capacity to around 14 GW. Recently, First Solar announced agreements worth up to $700 million in tax credits earned from 2023. The expected realization of $1.0 billion to $1.05 billion in Section 45X tax credits this year significantly boosts profits, pushing gross margins to 50% in Q3 2024, a remarkable increase from below 40% in 2023.

The loss of these credits could greatly affect First Solar, raising the question: how secure are these incentives under a potential Trump presidency? While Trump has expressed intentions to eliminate several subsidies, including the $7,500 electric vehicle credit and unspent funds from the Inflation Reduction Act, the Section 45X tax credit may remain intact. Trump promotes U.S. manufacturing and aims to restore American jobs, and he may shield domestic solar manufacturers, like First Solar, from foreign competition. Currently, a 50% tariff exists on photovoltaic solar cells imported from China, providing protection for U.S. companies.

In summary, several long-term factors bode well for both the solar sector and First Solar. The broader economic picture is improving; inflation has eased significantly, and the Federal Reserve recently cut interest rates for the first time in almost four years. This development could foster growth among renewable energy stocks by lowering financing costs for large projects. Our price estimate for First Solar stands at $204, slightly above the current market price. For more insights, see our analysis of First Solar Valuation: Expensive or Cheap.

[1] Returns as of 11/1/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.