Solar energy is facing a double headwind. First, the Republican election win hurts green initiatives and threatens solar energy credits. Second, the solar energy sector faces steep price drops and excess supply. First Solar (FSLR), the darling of the sector, announced guidance that confirms more trouble ahead.
First Solar’s face value of a 6x P/E is misleading. The company’s lowered guidance and earnings expectations through 2018 is negative. It is ending Series 4 production and moving directly to Series 6. Expect higher solar chip efficacy and lower operating costs of 25 percent. The shift is a positive development for First Solar’s long-term prospects, but the short-term outlook is very cloudy.
Capex will go up while operating costs will be cut, largely through job cuts. The production shift addresses the glut in solar panels and falling prices, but leaves the company vulnerable. The solar energy sector is not assured to see price drops moderating. The industry must work through the excess supply.
U.S. government policies may put an end to tax benefits and subsidies for solar energy implementation. This risk is remote and is less pronounced than weak natural gas and oil prices.
As First Solar’s long slide on the markets plays out, the discount gets bigger. At some point, this will give investors enough margin of safety. If 2018-9’s prospects are as good as management believes with Series 6, the time to buy First Solar is approaching.