Shareholders of First Solar would probably like to forget the past six months even happened. The stock dropped 30.6% and now trades at $193.08. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy First Solar, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.Even with the cheaper entry price, we're swiping left on First Solar for now. Here are three reasons why there are better opportunities than FSLR and a stock we'd rather own.
Why Is First Solar Not Exciting?
Headquartered in Arizona, First Solar (NASDAQ:FSLR) specializes in manufacturing solar panels and providing photovoltaic solar energy solutions.
1. Low Gross Margin Hinders Flexibility
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.
First Solar’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 28.6% gross margin over the last five years. Said differently, First Solar had to pay a chunky $71.36 to its suppliers for every $100 in revenue. 
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 19.6 percentage points over the last five years. If this 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 15.4%.
3. Short 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 $591.3 million of cash over the last year. With $1.27 billion of cash and $581.6 million of debt on its balance sheet, the company has around 14 months of runway left.
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 isn’t one of our picks. After the recent drawdown, the stock trades at 9.8x forward price-to-earnings (or $193.08 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d recommend looking at CrowdStrike, the most entrenched endpoint security platform.
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