E First Solar: Make Hay While The Sun Shines

Recommendation Summary

Within close reach of its 12 month high, is First Solar (FSLR) worth investing in?

*Source: Bloomberg

First Solar currently trades around $60, which puts the company’s stock price at a 12 month high. Despite this I find the company undervalued by around 15%. I believe the market has underemphasized the constant development towards better cell efficiency and ever improving CdTe (cadmium telluride) technology, and overemphasized the recently fallen margins.

Company Background and Overview

First Solar is a  is an American photovoltaic manufacturer of thin film modules, a provider of utility-scale PV power plants and supporting services that include finance, construction, maintenance and end-of-life panel recycling.

First Solar produces thin film solar panels from cadmium telluride; these panels have 350 times smaller light absorbing layers than the traditional silicon panel. Because of the efficient semi-conductor built into the cells, thin film solar cells are the lightest PV cells you can find. First Solar is considered to be the top innovator and seller in the CdTe space, which makes up around 50% of the market in thin film solar panels.

In the last 3 years (including TTM) the company has experienced declining revenues at an average of 8% per year mostly fueled by a result of lower systems projects in the US and Japan and material delivery delays. This coupled with higher cost of sales contributed to constantly lower operating income in the last years.

Below you can find the main revenue segments broken down:

*Source: Company filings and author’s own estimates

As we can see from the graph above, operating margin is directly correlated to the growth of the solar power systems revenue segment.

Investment Thesis

Currently, I believe the market sees FirstSolar as a growing innovative market-leader in the solar industry, fueling this is the latest Series 6 panel production and the end-to-end EPC (engineering, procurement, and construction) service the company provides.

However I think the stock is priced imperfectly because of the reasons listed below:

*Although I do acknowledge the Series 6 panel in my valuation I will not include it in my investment thesis since there is enough info on it out there.

Cadmium telluride technology

*Source: Cosmoso

CdTe has several benefits over traditional silicon panels. It uses low-cost manufacturing technology to produce, the material is well matched to the solar spectrum and its nearly optimal for sunlight conversion. Since cadmium is a byproduct of zinc production, it is also much cheaper than silicon.Despite all of the benefits surrounding the usie of cadmium telluride there are also several major drawbacks to using this technology.

Cadmium is much less efficient than the typical silicon panel. The typical cadmium telluride panels have an efficiency of 10-11% and do not reach the efficiencies of standard silicon panels. Despite this, as CdTe technology develops we are seeing new records broken by the year. Recently a company called Calyxo reached 15.4% efficiency and is targeting 18% efficiency in the near future. Also First Solar reached 17%+ efficiency in its latest Series 6 model.

The other major drawback is that tellurium is also considered to be very rare and its abundance in the Earth’s crust is comparable to that of platinum about 1 µg/kg. Мost of the tellurium comes as a by-product of copper. In 2017 it was found that some deep undersea ridges are quite rich in tellurium, having concentrations 50,000 times higher than in deposits on land, but until recently there wasn’t any safe way to mine the deposits. Now a “bus-sized robot” is about to change that. The robot called Patania II is about to descend four kilometers into the ocean and will try to suck up metal-rich nodules through four vacuums in the Clarion-Clipperton Zone. If successful, it will deposit the nodules at a designated spot, since the current model can’t transport them back to the surface. Despite this the company is looking at making a third vehicle in 2023 that will be able to bring the nodules up to awaiting surface ships. But there are many roadblocks accompanying deep-sea mining. First and foremost deep-sea mining could cause vast damages to the oceanic life and secondly the rules of mining in international waters are still being formulated by the International Seabed Authority and are not quite ready yet.

If Patania II can safely mine tellurium from the bottom of the sea and be able to reach the surface, I expect prices of telluride to drastically change, thus making CdTe cell production even cheaper.

The Future of Cadmium Telluride

TCO Improvement: Universities and labs have been focusing on exploring additional ways to allow more light to be absorbed into the cell by focusing on developing innovative TCO (transparent conducting oxides) doping strategies which will reduce resistivity. Transparent conductive oxides are metal oxides with high electrical conductivity and transparency used in solar cells, liquid crystal displays, touch-screens etc… The main strategy of scientists is to dope known TCOs with other elements, thus increasing the conductivity without degrading the transparency.

Combing Silicon and CdTe: Since thin film solar cells are considered to be in high demand because of their low cost to high efficiency ratio, many researchers are focusing on different ways to enhance thе CdTe cell to reach better efficiencies. A study I found focused on researching multijunction solar cells consisting of two or more sub cells. This study focused on combining cadmium telluride with silicon in order to reach better efficiency. After the optimal values of thickness and cell output parameters were found, the results showed an increased conversion efficiency of 28.45% compared to the basic CdTe cell efficiency of 19.7%. It was also found that this cell’s temperature coefficient is −0.15%/◦C, which indicates the better degree of stability of the cell compared to the traditional CdTe cell.

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I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I have no business ...

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