Semiconductors company First Solar stunned Wall Street today as it surged to $191.87, marking a 4.8% change. FSLR is -14.44% below its average analyst target price of $224.24, which implies there is more upside for the stock. As such, the average analyst rates it at buy.
First Solar, Inc. provides photovoltaic (PV) solar energy solutions in the United State, Japan, France, Canada, India, Australia, and internationally. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.
The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.
First Solar's trailing 12 month P/E ratio is 479.7, based on its trailing EPS of $0.4. The company has a forward P/E ratio of 15.0 according to its forward EPS of $12.82 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
First Solar's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 4.5 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on FSLR's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 2,619,319 | 2,549,461 | 2.67 | -89.31 |
| 2021-12-31 | 2,923,377 | 2,193,423 | 24.97 | -0.52 |
| 2020-12-31 | 2,711,332 | 2,030,659 | 25.1 | 39.99 |
| 2019-12-31 | 3,063,117 | 2,513,905 | 17.93 | n/a |
- Average gross margin: 17.7 %
- Average gross margin growth rate: -37.9 %
- Coefficient of variability (higher numbers indicating more instability): 59.7 %
We can see from the above that First Solar business is not strong and its stock is likely not suitable for conservative investors.
First Solar's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 873,369 | -903,605 | -30,236 | 90.01 |
| 2021-12-31 | 237,559 | -540,291 | -302,732 | 20.23 |
| 2020-12-31 | 37,120 | -416,635 | -379,515 | 23.26 |
| 2019-12-31 | 174,201 | -668,717 | -494,516 | n/a |
- Average free cash flow: $-301749750.0
- Average free cash flow growth rate: 50.3 %
- Coefficient of variability (lower numbers indicating more stability): 65.4 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for FSLR, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. First Solar's P/B ratio is 3.49, indicating that the market value of the company exceeds its book value by a factor of more than3, but is still below the average P/B ratio of the Technology sector.
As of first quarter of 2023, First Solar is likely fairly valued because it has an inflated P/E ratio, a lower P/B ratio than its sector average, and a pattern of improving cash flows that are on an upwards course. The stock has poor growth indicators because of its weak operating margins with a negative growth trend, and an inflated PEG ratio. We hope this analysis will inspire you to do your own research into FSLR's fundamental values -- especially their trends over time.
