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

First Solar FSLR shares rose sharply (up 25% at the time of writing) following the U.S. Department of the Treasury 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 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, the qualification of this bonus credit largely hinges on the solar panel (equates to 30% of a typical project’s cost). There has been an outstanding question of whether solar panels that are largely manufactured elsewhere but have final assembly in the U.S. would be able to qualify as “domestic content.” We view the sharp move in First Solar’s share price as attributed to expectations that the final rules will require solar cell plus module assembly in the U.S. to qualify. In addition, we believe there is to 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 by raising the bar competitors must meet to qualify for the bonus credit (now must include more capital-intensive cell manufacturing), whereas First Solar’s thin film technology is already vertically integrated.

While this guidance raises the requirements for First Solar competitors by having to integrate more of their supply chain in the U.S., we don’t expect it to stop competitors from ultimately doing so (but it will be more expensive and take longer). 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.