We came across a bullish thesis on Daqo New Energy Corp. (DQ) on “From $100K to $1M” & More.’s Substack by YZ and Kyler Johnson. In this article we will summarize the bulls’ thesis on DQ. Daqo New Energy Corp. (DQ) share was trading at $16.95 as of Sept 18th.
A field of solar panels glistening in the afternoon sun, symbolizing the company’s renewable energy ambitions.
Daqo New Energy, a leading producer of polysilicon for solar panels, operates within a highly volatile market characterized by boom and bust cycles. The company specializes in high-purity polysilicon, crucial for manufacturing efficient photovoltaic cells that convert sunlight into electricity. As a commodity-driven industry, polysilicon prices fluctuate widely, influenced by supply and demand dynamics. With over 90% of global polysilicon production based in China, the market is intensely competitive, often resulting in significant profit volatility.
Historically, the polysilicon industry has experienced multiple boom and bust cycles, as illustrated by data from 1977 to 2022. Currently, the industry is in a downturn, with polysilicon prices having dropped by approximately 80% from their recent peak. This situation has led to a high likelihood of high-cost producers exiting the market by the end of 2024, as anticipated by Daqo’s management. Despite these challenges, global demand for polysilicon is projected to grow at an average annual rate of 12.8%, which could set the stage for a recovery in prices.
Financially, Daqo stands out with impressive metrics. Since the end of 2009, the company has maintained a median free cash flow (FCF) margin of 7.8%, compared to a negative median FCF margin for its competitors. Daqo’s return on invested capital (ROIC) has averaged 11.3%, significantly outperforming its peers. As of March 31, 2024, the company has a robust net cash position of $2.7 billion. Additionally, Daqo has actively reduced its share count by nearly 2% annually and recently announced a $100 million buyback program, indicating a commitment to shareholder value.
Operationally, Daqo’s management has demonstrated exceptional cost control and capital efficiency, setting a high bar for competitors. Although the decline in polysilicon prices poses a risk, Daqo’s low-cost production and substantial cash reserves position it to weather the downturn better than many of its peers. Historical data suggests that the polysilicon market follows a cycle of about 13.5 years, and with roughly 2 years elapsed since the last peak, another upswing could be expected in 6-8 years.
Valuation of Daqo reveals significant upside potential. Assuming polysilicon prices rebound to recent peak levels, Daqo’s revenue could increase by 50%, reaching approximately $6.9 billion. With a conservative estimate of a 50% FCF margin, the company’s free cash flow could total $3.45 billion. At a valuation multiple similar to the previous peak, this would imply a potential share price of $162.70, representing an impressive 850% return from the current $17 share price, translating to a projected 30% annual return over 8 years.
Daqo New Energy Corp. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 12 hedge fund portfolios held DQ at the end of the second quarter which was 16 in the previous quarter. While we acknowledge the risk and potential of DQ as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.