Getting In Cheap On First Solar, Inc. (NASDAQ:FSLR) Is Unlikely

With a price-to-sales (or "P/S") ratio of 5.6x First Solar, Inc. (NASDAQ:FSLR) may be sending bearish signals at the moment, given that almost half of all Semiconductor companies in the United States have P/S ratios under 4.4x and even P/S lower than 1.8x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for First Solar

What Does First Solar's P/S Mean For Shareholders?

Recent times haven't been great for First Solar as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on First Solar will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For First Solar?

There's an inherent assumption that a company should outperform the industry for P/S ratios like First Solar's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. The latest three year period has also seen a 22% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 26% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 27% each year growth forecast for the broader industry.

With this in consideration, we find it intriguing that First Solar's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given First Solar's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for First Solar that you should be aware of.

If these risks are making you reconsider your opinion on First Solar, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.