First Solar: Shares Jump Following U.S. Treasury Guidance on Domestic Content Requirements

First Solar Stock at a Glance

• Fair Value Estimate: $185
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

First Solar Stock Update

First Solar FSLR shares rose sharply (up 25% at the time of writing) following the U.S. Department of the Treasury’s guidance on domestic content requirements for solar panels. We raise our fair value estimate to $185 from $174 (based on our current understanding of the requirements) and expect the company to announce a further U.S. capacity expansion in short order. Despite our increased valuation, we view the shares as overvalued.

The Inflation Reduction Act of 2022 includes a 10% bonus tax credit for renewable energy projects using domestic content. For solar projects, qualifying for this bonus credit largely hinges on the solar panel (which equates to 30% of a typical project’s cost). There has been an outstanding question of whether panels that are largely manufactured elsewhere but have final assembly in the U.S. would qualify as “domestic content.”

We believe the sharp move in First Solar’s share price can be attributed to expectations that the final rules will require solar cell plus module assembly in the U.S. for a project to qualify. In addition, we believe there will be no transition period under which module assembly alone would qualify for the bonus, which solar developers were lobbying for. This is positive for First Solar because it raises the bar competitors must meet to qualify for the bonus credit (since they would have to include more capital-intensive cell manufacturing). For its part, First Solar’s thin film technology is already vertically integrated.

While First Solar’s competitors must integrate more of their supply chains in the U.S., we don’t expect this guidance to stop them from ultimately doing so (though it will take longer and be more expensive). As such, we see a less favorable supply/demand backdrop for First Solar in the U.S. market in the back half of this decade as competitors build capacity.