First Solar, Inc. (FSLR) has been one of the most volatile and inconsistent Standard & Poor's 500 members in recent years, and the turmoil has led to the stock being removed from the index. Shares were close to $70 in early 2016 but fell to $28.30 by March 2016. The stock has endured multiple sell-offs over the past year, and S&P announced a 13 percent increase in its minimum market capitalization threshold for index constituents. It was announced in early 2017 that FSLR would be removed from the S&P 500. However, a strong first quarter 2017 earnings announced a 25% increase in May, rewarding investors who remained through the delisting.

Source: Google Finance

First Solar has very volatile financial results. It operates in two segments – components and systems. Components are mostly solar modules sold to existing solar energy systems. The systems segment generates revenue by designing, constructing and operating generation facilities that have been sold to electrical utility companies. This process results in inconsistent revenues and profits, with large projects driving income in only some periods. There are also high capital expenditure requirements associated with systems design and construction, so cash flows are similarly inconsistent. (See also: First Solar Down 14% Since Earnings Report: Can It Rebound?)

FSLR Revenue History

Fist Solar reported encouraging results for the first quarter 2017, with revenue rising 2 percent year-over-year and 170 percent sequentially. The improvement was attributed to a large facility sale, though there it was notably offset by lower module sales. Revenue had declined 17.5 percent for the full year of 2016 and 49 percent for the fourth quarter, so this was welcome news. Company management increased revenue guidance for 2017 by $50 million.

FSLR EPS History

FSRL Profit Metrics

FSLR Gross Margin History

First Solar delivered $9.1 million of GAAP net profit. This was 95 percent below the prior year's figure due to higher cost of sales, lower equity earnings from unconsolidated affiliates, and restructuring and impairment charges. However, non-GAAP adjusted profits were substantially higher at $25 million. Gross margin continued to slide, falling 22.6 percentage points to 9.4 percent, and management forecasts a 12.5-14.5 percent gross margin for the full year, which would be the lowest level of the past decade. Though profits fell and margins became more narrow, the trend is encouraging following the write-offs and large net accounting loss in 2016.  First Solar's new guidance calls for a $15 million profit improvement over prior estimates, and a $0.25 improvement in non-GAAP earnings per share. 

FSLR Margins

Stronger outlook is especially important for First Solar, because the company's outlook was likely the most troublesome aspect for investors. First Solar raised its revenue guidance but greatly reduced its GAAPoperating income forecast early in the year, but first quarter revisions partially offset those prior adjustements. The company also previously slashed guidance on cash flow from operations by $300 million, $100 million of which was reversed recently. Capital expenditure guidance was unchanged. First Solar no longer expects a GAAP loss per share, and adjusted earnings per share (EPS) is still forecast at a slightly positive figure. (See also: First Solar Struggling Against Trump Headwinds.)

Financial results and guidance were a major driver of the recent share price declines, but the negativity around the company extends beyond a poor earnings report. First Solar is launching a new generation of solar modules that can produce energy much cheaper than the current efficiency levels. Some estimates are placing that efficiency at $0.22 per watt by 2020. For a long time, solar companies have relied on government subsidies to overcome a deficit relative to other energy sources, but solar power can now be delivered at a lower cost than traditional energy sources in many markets. With First Solar's new generation of modules, its focus will be turning away from the systems segment to a more stable offering. (See also: The Current State of the Solar Energy Industry.)

First Solar has been able to withstand difficult times that have doomed many competitors, but current trends pose a serious threat. China is now the largest market for solar, and a number of competitors that will challenge First Solar's technological supremacy have established themselves in that country. The rapid decline of solar energy costs has actually hurt energy providers' ability to resell power at sufficiently high prices, adding financial risk to the competitive environment.

First Solar is struggling to produce profits during a transitional period in an industry that is far from mature. This makes First Solar stock a speculative investment at this point, with significant risks attached to uncertainty. Nonetheless, there are encouraging aspects to the story for investors with the appropriate risk tolerance. (See also: 2017: A Turning Point for the Solar Industry.)

FSLR Financial Health

The company has a strong balance sheet. First Solar's current and quick ratios have actually been trending upward, now at 6.32 and 5.50, respectively, and its financial leverage is low relative to recent historical levels. The company has an opportunity to become a technology leader in an era when solar is newly self-sustaining. If prices are stable and the company can match up favorably with a new wave of Chinese competitors, then First Solar will have an opportunity to move past its recent struggles, and the stock is now at a heavy discount to prior valuations. (See also: First Solar Commissions Moapa Southern Paiute Solar Project.)

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