Over the past six months, First Solar’s stock price fell to $171.66. Shareholders have lost 10.1% of their capital, which is disappointing considering the S&P 500 has climbed by 5.2%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in First Solar, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is First Solar Not Exciting?

Despite the more favorable entry price, we don't have much confidence in First Solar. Here are three reasons why we avoid FSLR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, First Solar’s 6.8% annualized revenue growth over the last five years was mediocre. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about First Solar.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, First Solar’s margin dropped by 18.5 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. First Solar’s free cash flow margin for the trailing 12 months was negative 22.9%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

First Solar burned through $976.3 million of cash over the last year. With $890.8 million of cash on its balance sheet, the company has around 11 months of runway left (assuming its $525.1 million of debt isn’t due right away).

Unless the First Solar’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of First Solar until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

First Solar isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 8.5× forward P/E (or $171.66 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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