Tax Credits To Continue Helping First Solar Stock

First Solar stock has fared a bit better than its sector peers, rising by about 14% year-to-date. In comparison, Enphase Energy stock, another solar component player, has seen its stock decline by 38% over the same period. Now, First Solar is slated to report its Q3 2024 results toward the end of this month. We expect earnings to come in at $3.10 per share, up from $2.50 in the year-ago period, while revenues are likely to come in at about $1.07 million, a growth of about 20% compared to last year. Both metrics are likely to be roughly in line with consensus estimates. So what are some of the trends that are likely to drive First Solar’s earnings for the quarter? See our analysis of First Solar Earnings Preview for a closer look at what to expect from the company’s results.

First Solar’s financial performance has been solid in recent quarters. Revenues rose by 25% year-over-year in Q2 2024, while net profit margins also surged to 34%, up from roughly 21% in the year-ago period. While profits are driven largely by regulatory tailwinds and easing supply chain constraints, First Solar’s more efficient thin-film solar panels and its focus on large-scale solar projects are also likely to help the company as volumes ramp up. Over Q2, the company saw record quarterly panel production totaling 3.7 gigawatts, and this trend is likely to continue. Demand for solar has remained strong with the company recording about 3.6 gigawatts of bookings from January through July, taking First Solar’s bookings backlog to 75.9 GW giving the company considerable demand visibility.

First Solar is also benefiting from the Section 45X tax credit under the U.S. Inflation Reduction Act, given that it has been doing an increasing mix of its manufacturing in the U.S. For perspective, toward the end of December 2023, the company announced that it had signed agreements for the sale of up to $700 million in 2023 tax credits it earned under the act. The company is likely to realize $1.0 billion to $1.05 billion of Section 45X tax credits this year as well, adding directly to its profits. For instance, gross margins stood at 49% in Q2 compared to 38% in Q3 2023. This increase was primarily driven by a larger mix of modules sold from the company’s U.S. factories, which qualify for Section 45X tax credits. We could see margins remain elevated over Q3 as well.

The increase in FSLR stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -12% in 2021, 72% in 2022, and 15% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could FSLR face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Overall, we think that there are multiple long-term positives for the solar sector at large and First Solar in particular. Things are getting better on the macro front. Inflation has cooled off considerably. In September, the Federal Reserve also cut interest rates for the first time in almost four years. This should bode well for renewable energy stocks, by making financing of large-scale projects more affordable. First Solar is emerging as one of the big beneficiaries of the U.S. efforts to encourage domestic renewables production given its vertically integrated manufacturing. That said, there are risks as well. A meaningful part of First Solar’s strong financial performance (and stock price appreciation) can be attributed to the Inflation Reduction Act and these tailwinds are likely to eventually ease. Moreover, the outcome of the upcoming U.S. Presidential and Congressional elections due in the coming weeks could prove a risk for the company. We have a $243 price estimate for First Solar, which is 21% ahead of the current market price. See our analysis of First Solar Valuation: Expensive or Cheap for more details.

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