Morningstar | First Solar's Backlog Keeps Growing but Profitability Remains a Long-Term Uncertainty
We are reaffirming our $57 per share fair value estimate for First Solar after the company reported third-quarter earnings that are on track to meet our full-year expectations despite a slight drop in gross margin. We also reaffirm our no-moat and stable moat trend ratings.First Solar reported $676 million of net sales in the quarter and $1.55 billion in the first nine months of the year. It appears that First Solar won't reach our $2.6 billion net revenue estimate primarily because of the timing of project sales that won't hit until 2019. This timing difference does not have a material impact on our fair value estimate.
Management cut its 2018 earnings guidance range to $1.40-$1.60 per share, down from $1.50-$1.90 but in line with our $1.47 estimate. Lower sales and margin compression contributed to the lower full-year outlook. We anticipated that First Solar would continue to face shrinking margins. We expect margin compression will be a key concern as projects become more competitive.
First Solar has added 5.2 gigawatts to its backlog in 2018 through late October and now has 11 GW of backlog, effectively locking in sales for its full production capacity through 2020. We think investors should now watch whether First Solar can win sales in 2021 and beyond without compromising margins and with its Series 6 technology. We assume First Solar will have to ramp up research and development spending in 2021 and beyond to remain competitive, which will also pressure profit margins.
First Solar is a provider of photovoltaic (PV) solar energy solutions. The company designs, manufactures and sells PV solar modules with a thin film semiconductor technology, and also develops and sells PV solar power systems that mainly use the modules it manufactures. The company also provides operations and maintenance (O&M) services to system owners. The company's modules segment involves the design, manufacture and sale of cadmium telluride solar modules, which convert sunlight into electricity. The company's second segment is its systems segment, through which it provides power plant solutions, which include project development, engineering, procurement, and construction services and O&M services.
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