First Solar

First Solar saw net sales decrease by 4% year on year to $1.06 billion, but adjusted EBITDA grow 15% year on year to $644 million, implying margin expansion of 990 basis points to 60.9%. Guidance is still calling for $2.7 billion at the midpoint, despite strong year-to-date performance.

Why it matters: EBITDA margin expansion was driven by an even greater expanding gross margin to 57% (or 12 percentage points). First Solar benefits from direct manufacturing tax credits and a protectionist US market—45x tax credits help reduce First Solar's cost of goods sold. Management flagged the higher mix of modules qualifying for Section 45x (under the US Inflation Reduction Act) as a driver of margin, which translates to roughly $0.17 per watt of savings for each module produced in the US. We expect First Solar to continue benefiting from this windfall. First Solar also benefits from its reliance on cadmium telluride for its solar modules, whereas most of the industry relies on crystalline silicon. That allows First Solar to bypass the global supply chain thanks to early reshoring efforts that avoid reliance on China and spikes in silicon pricing.

The bottom line: We maintain our $206 per share fair value estimate for no-moat First Solar. We adjusted near-term volumes for guidance though we raised our assumed average selling price over the medium term given the visibility management cited on the call from its US bookings. Management has exercised good discipline with its contracting strategy. We point to its 1.9 gigawatts of US gross bookings at an average selling price of $0.36 during the quarter, with potential to charge more thanks to "technology adjusters" for efficiency improvements. Developers pay this premium that First Solar locked in through multiyear contracts given the certainty First Solar offers, especially amid the limited amount of domestic panel capacity over the next few years, with potential for higher pricing in the US given a constructive environment.

BLANK PAGECapital allocation remains worth watching as First Solar receives a windfall of domestic manufacturing credits in the years to come and as its capacity expansion winds down. Management reiterated its prior commentary, including a preference for organic and inorganic growth that advances its technology roadmap (perovskite commercialization). However, commentary also signaled potential share repurchases for evaluation later this year.

For more of our thoughts on First Solar, please see our Jan. 15 note, "First Solar: Three Things to Watch for in 2026."

We maintain our $206 per share fair value estimate for no-moat rated First Solar following second-quarter earnings. We adjusted near-term volumes for guidance though we raised our assumed average selling price over the medium term as an offset given the visibility management cited on the call from its US bookings.

The key drivers behind our valuation include shipment volume, average selling prices, gross margin, capital expenditures, and US manufacturing incentives. We expect capacity to grow to 22 gigawatts by year-end 2027, thanks to US and India expansions, partially offset by lower Southeast Asia capacity.

We forecast average selling prices to rise modestly over the medium term to the low- to mid-$0.30 per watt range, before declining into the early 2030s as incentives expire. We forecast long-term gross margins (excluding tax credits) in the low- to mid-20% range. In addition, we incorporate US manufacturing tax credits of $0.17 per watt for US production.

We do not believe First Solar possesses an economic moat as we think the solar module industry is fiercely competitive, competes primarily on cost, and has a long history of poor returns on invested capital. However, we view the US policy in recent years as providing First Solar a much improved competitive position in its core market, the US.

While solar has experienced tremendous growth in installations over the past decade, solar module firms have not benefited. Cost declines have led to solar becoming economically attractive in more geographies and against traditional forms of generation. The primary driver behind these cost declines has been falling prices of solar modules (typically the largest single cost of a solar project).

Solar module production is heavily concentrated in Asia (over 90% of production), with China representing the largest single country (approximately 67%). We view this as driven by the region’s low-cost manufacturing base and the strategic importance the Chinese government placed on solar manufacturing.

As the industry scaled, products became increasingly commoditized, with limited long-lived differentiation (new innovations were quickly copied). We view the limited differentiation as also limiting customer switching costs in switching from one supplier to another. In particular, the utility-scale segment (First Solar’s targeted end market) sees a high degree of commoditization among products. Unlike a rooftop solar installation, where space constraints encourage the use of high-efficiency panels, utility-scale projects are more focused on lowest-cost rather than the most technologically advanced panels.

First Solar is unique in the broader solar module industry. Its technology—thin film (specifically cadmium telluride)—represents only a minor portion of the overall market (approximately 5%). Crystalline silicon is the dominant technology across the industry, accounting for 95% of the market. C-Si benefits from its robust scale, long history, and higher efficiencies. In contrast, First Solar’s thin-film technology has lower efficiencies but benefits from a simple manufacturing process and higher energy yield in hot/humid climates.

While First Solar’s technology is unique in the industry, we view it as supporting a moat only to the extent that it enables a durable cost advantage over c-Si competitors. We do not view this to be the case and believe First Solar’s costs per watt to be modestly higher than that of its c-Si competitors. Raw material prices for c-Si (polysilicon) would have to increase materially on a continued basis to support a relative cost advantage for First Solar, which we view as unlikely.

First Solar’s balance sheet strength has enabled the company to persist through solar cycles when competitors have failed.

First Solar’s thin-film cadmium telluride technology is unique in the industry and benefits from its simple manufacturing process and supply chain.

First Solar is well positioned to benefit from US solar manufacturing incentives.

First Solar competes in the fiercely competitive and highly commoditized solar module industry.

First Solar’s cost per watt is generally higher than crystalline silicon peers.

First Solar's long-term competitiveness and financial performance hinge heavily on US policy decisions.