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Shares of First Solar (NASDAQ: FSLR) have been blistering hot this year, surging more than 50%. That outperformance likely has investors wondering if the solar panel maker has enough power to continue the trend. Here's a closer look at the bull and bear case for the renewable energy stock.
The bull case for First Solar
Solar panel makers have struggled in recent years. While the industry has grown installations at a blistering pace, the price of solar panels has been under pressure due to intense competition. That has put pressure on margins.
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First Solar, however, is working to boost its profitability by transitioning to a new higher-margin solar panel, Series 6, which should enhance its future results. While the company posted a loss of $0.64 per share in the first quarter, it sees its full-year profit coming in between $2.25 and $2.75 per share, which would be more than 80% above 2018's level. Earnings should continue growing in future years as the company finishes up its manufacturing capacity expansions to support the robust demand for Series 6.
First Solar has the potential to grow at a fast pace for years to come given the jaw-dropping investment potential of the renewable energy industry. According to one estimate, the global economy needs to invest $10 trillion to transition from fossil fuels to renewables. Given that First Solar makes some of the most cost-competitive panels in the industry, it should be able to capture a meaningful portion of these investment dollars.
In addition to its high-powered earnings growth, First Solar also has the best balance sheet in the solar industry. The company currently expects to end this year with between $1.7 billion and $1.9 billion of net cash, which should only increase as it cashes in on Series 6. That gives it the funds to potentially enhance shareholder returns in the future. It could do that by investing in additional expansion initiatives or returning some of this money to investors via a dividend or share repurchase program.
The bear case for First Solar
The rally in First Solar's stock this year has its shares trading at a premium price. With the stock currently above $65 and the company on track to earn $2.50 per share at the midpoint of its guidance range, it implies that First Solar trades at 26 times earnings. That's well above the 21.7 times multiple of the S&P 500. While the company does expect to grow at a fast pace in the coming years, shares could tumble if it misses expectations.
Another concern with First Solar is that it needs to continue investing in new products so that it doesn't fall behind the competition. While the company doesn't make the most efficient panel, it does build one of the more cost-competitive ones. However, if future products don't stay ahead of the competition, the company could lose market share, which would impact profitability.