Over the past six months, First Solar has been a great trade, beating the S&P 500 by 8.2%. Its stock price has climbed to $184.79, representing a healthy 13.4% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in First Solar, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is First Solar Not Exciting?

Despite the momentum, we're cautious about First Solar. Here are three reasons why you should be careful with FSLR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, First Solar grew its sales at a mediocre 6.8% compounded annual growth rate. 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 18.9 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 21.7%.

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 $942.7 million of cash over the last year. With $1.15 billion of cash on its balance sheet, the company has around 15 months of runway left (assuming its $577.9 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. With its shares outperforming the market lately, the stock trades at 9.4× forward P/E (or $184.79 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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