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Morningstar | First Solar Trying To Keep Up With Demand

First Solar is well positioned to capitalize on worldwide solar energy growth. But that doesn't necessarily mean the stock is a slam dunk investment.Solar energy has a long worldwide growth runway as costs come down and all populations move toward cleaner energy. However, First Solar must stay ahead of a large pack of competitors by reducing panel costs and increasing efficiency.The two primary sources of differentiation for solar module makers like First Solar are cost and efficiency rate--modules’ ability to turn sun into electricity. First Solar was a leader in both several years ago, but it has lost its cost advantage, primarily to leading Chinese firms. The industry's worldwide manufacturing capacity exceeds demand, creating a price war that is likely to persist.Maintaining margins and staying ahead of the competition will require First Solar to make new investments, pinching shareholder returns on capital at times. The Series 6 modules that the firm began selling in 2017 will be a big test. The Series 6 should allow First Solar to maintain its technological advantage while minimizing costs, but it could leave some stranded costs from the outdated Series 4 modules.Another concern is First Solar's concentrated business. In addition to supplying its core modules, the company offers turnkey development and operating capabilities. But project owners can increasingly find solar developers and operators worldwide. First Solar is no longer unique in this business. Industrial conglomerates and utilities much larger than First Solar can offer these services at least as well as First Solar. If First Solar can maintain its module efficiency advantage and continue its sales momentum, shareholders should realize solid returns. The 2018 U.S. solar tariffs offer a nice near-term boost, but we don't expect them to have a long-term impact. Instead, we expect First Solar will have to innovate constantly to stay ahead of competitors chasing the fast-growing solar market. We think selling its joint venture yieldco, 8point3, in 2018 was a good move since its cost of capital advantage had eroded.