First Solar Stock Is Estimated To Be Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of First Solar (NAS:FSLR, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $85.69 per share and the market cap of $9.1 billion, First Solar stock is estimated to be significantly overvalued. GF Value for First Solar is shown in the chart below.


First Solar Stock Is Estimated To Be Significantly Overvalued
First Solar Stock Is Estimated To Be Significantly Overvalued

Because First Solar is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 0.95% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. First Solar has a cash-to-debt ratio of 3.62, which which ranks in the middle range of the companies in Semiconductors industry. The overall financial strength of First Solar is 8 out of 10, which indicates that the financial strength of First Solar is strong. This is the debt and cash of First Solar over the past years:

First Solar Stock Is Estimated To Be Significantly Overvalued
First Solar Stock Is Estimated To Be Significantly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. First Solar has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $2.7 billion and earnings of $3.73 a share. Its operating margin is 11.93%, which ranks in the middle range of the companies in Semiconductors industry. Overall, GuruFocus ranks the profitability of First Solar at 5 out of 10, which indicates fair profitability. This is the revenue and net income of First Solar over the past years:

First Solar Stock Is Estimated To Be Significantly Overvalued
First Solar Stock Is Estimated To Be Significantly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of First Solar is -3.4%, which ranks worse than 68% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is 16.2%, which ranks in the middle range of the companies in Semiconductors industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, First Solar's ROIC is 9.11 while its WACC came in at 9.52. The historical ROIC vs WACC comparison of First Solar is shown below:

First Solar Stock Is Estimated To Be Significantly Overvalued
First Solar Stock Is Estimated To Be Significantly Overvalued

In closing, the stock of First Solar (NAS:FSLR, 30-year Financials)shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about First Solar stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.

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