Over the past two years, solar manufacturers have been hampered by supply chain disruptions including increasing material costs for polysilicon. Indeed, last year, Rystad Energy estimated that rising equipment and shipping costs could lead to postponement or cancellation of 56% of worldwide utility-scale solar projects that had been planned for 2022. Luckily, these challenges have been rapidly fading. Energy prices have fallen back to pre-war levels, driven lower by fears of a global recession and weak oil demand in China due to Covid outbreaks. The same scenario is unraveling in the solar sector, with Bloomberg New Energy Finance (BNEF) reporting that costs of solar materials have dropped by more than a third since mid-November. The prices of wafers have fallen even more sharply, with wafer costs falling as much as 21 percent this week alone.
These developments have inspired Wall Street to turn bullish on the sector. Goldman Sachs has predicted that the sector will record a compound annual growth rate (CAGR) of 18% for solar installations through 2026, fueled at least in part by the supportive provisions of the Inflation Reduction Act (IRA) as well as falling costs. Goldman’s 5-star analyst Brian Lee has tapped three solar stocks as good buying propositions, saying they hold at least 50% upside over the timeframe.
Another big reason why the sector is likely to remain hot for years: solar is by far the cheapest source of energy, with new utility-scale solar projects having roughly half the cost of coal and natural gas.
CCGT: combined-cycle gas turbines
OCGT: open-cycle gas-turbine
CSP: concentrated solar power
Here’s a deeper dive into GS’ picks.
- First Solar
Market Cap: $15.5B
12-Month Returns: 74.2%
First Solar Inc. (NASDAQ:FSLR) is the largest U.S.-based developer of solar panels, with a focus on utility-scale panels. First Solar says it has the ability to manufacture 20+ gigawatts of panel capacity annually, and has spent $1.5 billion cumulatively in R&D since its founding in 1999.
Goldman’s Brian Lee has projected that First Solar will be one of the companies that will benefit the most from the IRA, “FSLR currently has ~3GW U.S. capacity, positing the company as an immediate beneficiary of the IRA manufacturing tax credits. FSLR expects to reach ~7GW nameplate capacity in the US by YE2023 and ~10GW by YE2025. Assuming FSLR qualifies for the $0.17/w credits, we estimate that these credits account for ~60% of FSLR’s ASP, and the 10GW capacity would imply an after-tax benefit of ~$1.4bn/year.”
Last year, First Solar announced that it will build a new solar panel manufacturing facility in the Southeast of the U.S. In November, the company picked Lawrence County in Alabama as the location of its $1.1B factory. The company also plans to spend $185 million upgrading and expanding its existing facilities in Ohio. The announcement came hot on the heels of the passing of the IRA Act, underpinning the impact it’s likely to have on First Solar’s business.
However, not every Wall Street analyst is bullish on FSLR especially over the short-term, with JPMorgan saying the easy money has likely been made while GLJ Research has downgraded the stock from a Buy to a Sell.
- Enphase Energy
Market Cap: $32.7B
12-Month Returns: 52.9%
Enphase Energy Inc. (NASDAQ: ENPH) is a leading designer and manufacturer of solar inverters, a critical hardware used in all solar energy installations. Over the past three years, Enphase has recorded steady earnings and revenue growth, with earnings in Q3 2022 clocking in at $634.7 million, a quarterly record and good for an impressive 80% Y/Y growth. Even more remarkable is that Enphase is not only solidly profitable, but also owns one of the biggest profit margins amongst the leading solar names with a gross margin north of 40%. Its nearest rival in this regard is SolarEdge Technologies (NASDAQ: SEDG) with GM of 29%. Interestingly, SolarEdge is one of the solar stocks that have recently received an upgrade: last month, Cowen reiterated its Outperform rating on SEDG and hiked its price target to $360 from $309, with analyst Jeffrey Osborne writing that SEDG is "well positioned to benefit from secular solar demand driven by policy and higher electricity rates."
Regarding IRA’s effects on Enphase, analyst Brian Lee notes that it is potentially a “direct and near-term beneficiary of manufacturing credits”.
“Assuming ENPH were to establish US capacity, ENPH would be eligible to capture the full amount of these credits, according to management. In addition, we believe ENPH is well positioned to benefit from the extension of the solar ITC which we believe will be supportive of a more stable demand environment for both residential and commercial solar and storage installations in the US,” according to the analyst.
- Array Technologies
Market Cap: $2.8B
12-Month Returns: 31.3%
Albuquerque, New Mexico-based Array Technologies (NASDAQ: ARRY) designs and manufactures solar ground monitoring systems. This company became famous for all the wrong reasons, after the stock crashed spectacularly following its October 2021 IPO. Thankfully, the shares have lately sputtered back to life, with ARRY up 31% over the past 12 months.
Lately, ARRY seems to be getting plenty of love on Wall Street, with Brian Lee predicting it will be “an immediate beneficiary of the demand tailwinds from the IRA”. Lee specifically highlights the extension of the solar ITC at 30% for the next decade, lending a great amount of certainty to the market.
Two weeks ago, Cantor Fitzgerald rated ARRY overweight:
“We believe Array is a logical long-term partner for engineering, procurement and construction firms and utility-scale solar operators given the company’s proven track record, robust supply chain and differentiated product offering,” Derek Soderberg wrote in an investor note.
Two months ago, Piper Sandler upgraded ARRY shares to Overweight from Neutral with a $28 price target, good for 53% upside, saying they foresee an improved forward outlook for the renewable energy firm.
By Alex Kimani for Oilprice.com
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