first solar (Nasdaq: FSLR), a global solar energy solutions provider headquartered in Arizona, is a low-cost AI leverager that the market has recently overlooked. FSLR stock rose more than 30 percent between May 20 and 22 based on two pieces of news. First, UBS (NYSE:UBS) identified the company as a key winner in AI-driven electricity demand. Second, China pledged to support the solar industry by ending the price war that has significantly affected the sector's profitability. I am bullish on FSLR stock, as I believe the expected growth has yet to be properly reflected in its valuation.
The opportunity for AI
The rise of creative AI has put enormous strain on global electrical grids as AI applications require large amounts of energy to operate. According to a study by Dr. Alexandra Sascha Lucioni, AI and Climate Lead Hugging Face, generative AI systems use about 33 times more energy than computers running task-specific software applications.
According to data from the International Energy Agency, global data centers consumed 460 terawatt-hours of electricity in 2022 and will use more than 1,000 terawatt-hours by 2026, which is growing rapidly due to increased use of AI. is growing According to the IEA's findings, this projected electricity consumption by data centers would be equivalent to the consumption of Japan with a population of 125 million.
A quick look at the energy consumption trends of leading AI companies confirms that AI investments have resulted in increased power consumption. For example, Microsoft (NASDAQ:MSFT), in its Environmental Sustainability Report for 2023, published earlier this month, revealed that carbon emissions have increased by nearly 30 percent since 2020, mainly due to new technologies to support AI technology. This is due to the construction of data centers.
The AI opportunity for First Solar arises as a result of carbon neutral targets set by governments and multinational companies during the AI boom. For example, the United States has pledged to reduce carbon emissions by at least 50 percent from 2005 levels by 2030. Microsoft, on the other hand, has pledged to be carbon negative by 2030. All the carbon that the company has emitted since its founding by 2050.
apple (Nasdaq: AAPL) has also committed to be carbon neutral for its supply chain and products by 2030. Given the massive increase in electricity consumption due to AI, large companies that invest in AI will be forced to source electricity from sustainable sources, and First Solar. Be seen as one of the biggest winners of this anticipated growth.
Investing for growth
First Solar is investing to expand its manufacturing capacity in the U.S. to meet the expected increase in demand for solar energy. During the Q1 earnings call earlier this month, the company discussed expansion plans in Ohio, Alabama, and Louisiana.
The company is also focusing on developing advanced solar technology to improve cost efficiency and thereby improve profit margins. For example, First Solar plans to launch a perovskite development line and a new innovation center in the second half of this year.
China spells good news for FSLR stocks.
On May 22, Chinese regulators promised to crack down on the sale of low-cost solar equipment materials, which is good news for established solar companies. Owing to the increasing number of solar equipment manufacturers, the past few years have seen an increase in manufacturing facilities, leading to an oversupply in the market. Solar companies have been pressing the Chinese government for months to intervene in hopes of cracking down on companies undercutting market prices.
First Solar, as an established global player, will benefit from the Chinese government's decision to take action to end the price war in the solar sector.
Is the first solar stock a buy, according to analysts?
On May 21, UBS analysts Jon Windham and William Grippin claimed that First Solar would benefit from power purchase agreements with major tech companies, as these tech giants saw their increased power consumption in the AI era. has pledged to bank on renewable energy sources to meet . Analysts guided for strong earnings per share for First Solar, from $7.74 in 2023 to $36.74 in 2027. UBS raised its price target for First Solar to $270 from $252 and maintained its buy rating.
Piper Sandler analyst Kashi Harrison raised his First Solar price target to $219 from $195. Furthermore, JP Morgan (NYSE: JPM) recently raised its price target to $262 from $240 and maintained a buy rating, while Susquehanna maintained a $258 price target after adding expected AI-driven demand for renewable energy. What did Roth Capital Markets analyst Philip Schein also believes FirstSolar will be a key beneficiary of the booming AI sector.
Overall, based on ratings from 27 Wall Street analysts, the average FSLR stock price target is $238, indicating a downside risk of 14.5% from the current market price.
Although analyst price targets indicate that investing in First Solar is a risky bet today, recent upgrades indicate that the average price target may continue to rise in the near future. This expectation is based on the company's favorable position in the renewable energy market and its ability to capitalize on the growing demand for electricity.
First Solar's price per share trades at a forward P/E of just 20x, making it a bargain, given that analysts estimate a fivefold increase in earnings per share by 2027.
Takeaway: First solar is cheap and attractive.
First Solar is well positioned to capture the growing demand for electricity generated by the rise of AI technology. The company appears to be undervalued in the market and recent upgrades from Wall Street analysts will likely act as a catalyst to push the stock price higher. China's pledge to support the solar sector by targeting price-cutting suppliers will add fuel to the recent momentum behind First Solar's stock.
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