Leading EV company Tesla Inc. (NASDAQ:TSLA) has lately been hogging the limelight after the company delivered yet another stellar quarterly report that cemented its status as one of the most disruptive technology companies in the world.
Tesla shone on all key metrics: The company built 237,823 cars (+64%) and delivered 241,391 (+73%), finishing Q3 with $1.3 billion in free cash flow and $16 billion in cash and cash equivalents. Revenue of $13.76B marked 56.9% Y/Y growth while GAAP net income of $1.6B was good for a 389% Y/Y increase.
However, it's the company's latest dealmaking exploits, rather than the quarterly scorecard, that has captivated Wall Street's imagination and brought the clean energy sector back into focus, again.
Tesla has become the first clean energy company to attain a market valuation of $1 trillion after inking a deal to supply 100K EVs to car rental company Hertz Global (OTCPK:HTZZ) by the end of 2022. Tesla has now joined the rarefied air shared by the likes of Apple Inc. (NASDAQ:AAPL), Microsoft Inc. (NASDAQ:MSFT) and Amazon Inc. (NASDAQ:AMZN) and Alphabet Inc. (NASDAQ:GOOG) which all boast a valuation of $1T+. The development is being viewed as an indication of the advantage that Tesla has in signing deals before General Motors (NYSE:GM) and Ford (NYSE:F) ramp up their EV lineups.
In an interview with CNBC, Wedbush Securities managing director Dan Ives has said that Tesla has reached a "watershed moment" by passing the $1T market cap mark, as the company remains in the early innings of a "green tidal wave."
But Tesla is not the only clean energy player being lifted by the green tidal wave.
After being left out in the cold for much of the year, Wall Street is beginning to warm up to the pivotal solar sector once again.
"The solar industry will continue to be constrained by poly supply in 2022 with prices staying high. We are expecting 25% growth in PV installations if module prices correct to 2020 levels of ~RMB 1.6/W, unleashing demand suppressed by high prices in 2021 and stimulating sales for inverters and trackers," Jefferies analysts have said.
Jefferies has tapped Daqo New Energy (NYSE:DQ) as its top solar energy selection, with DQ shares rocketing 11% higher after the analysts assigned it a potential upside to $208–good for a nearly 4x jump over current levels.
Solar names have also received a boost on the ongoing optimism that an extension of the federal tax credit on investments in the industry will remain in the budget bill making its way through the U.S. Congress.
"The best thing that D.C. can do for solar is to pass the tax credit package," Meghan Nutting, Sunnova Energy (NYSE:NOVA) executive VP of government and regulatory affairs, has told Bloomberg.
The latest developments have lifted the entire sector, with the TAN ETF up 12.5% over the past two weeks.
However, not everybody is so sanguine about the sector's outlook. Just a week ago, the sector received a major scare after Guggenheim Partners downgraded several names in the sector, citing rising input costs and the shares' recent relative outperformance. Guggenheim downgraded First Solar (NASDAQ:FSLR), SolarEdge Technologies (NASDAQ:SEDG), Array Technologies (NASDAQ:ARRY), and Shoals Technologies (NASDAQ:SHLS) to Neutral from Buy, citing "risks to consensus expectations rising, notably in utility and large-scale commercial solar."
We remain largely bullish on the solar sector because, just like Tesla, it's an industry in the early innings of the green tidal wave, meaning plenty of growth runway ahead. Here are our top picks.
#1. SunPower Corp.
Market Cap: $5.1B
YTD Returns: 19.6%
San Jose, California-based Sunpower Corp.(NASDAQ:SPWR) manufactures crystalline silicon photovoltaic cells and solar panels based on an all-back-contact solar cell technology.
SunPower really is an old head in the solar industry and has tried its hand at many aspects of the business. However, the company's latest act involves becoming a more specialized player in solar technology, after selling its microinverters business to Enphase in 2018 and completing the acquisition of Maxeon (NASDAQ:MAXN) in 2019.
A key benefit of this strategy has been a reduction in SunPower's cost of capital and a healthier balance sheet. It's too early to tell whether SunPower's streamlining efforts will pay off in the long run, but if you love a good turnaround story, this company might be a good buy.
SunPower has lately shifted its focus on residential solar, announcing its $165M purchase of Blue Raven Solar in a bid to focus exclusively on the residential solar market.
"The residential business is larger, it's faster growing and it's more profitable," SunPower CEO Peter Faricy told CNBC following the deal news.
#2. First Solar
Market Cap: $11.3B
First Solar (NASDAQ:FSLR) is the largest solar manufacturer in America and the third-largest in the world.
First Solar manufactures solar panels, photovoltaic power plants, and related services, including construction, maintenance, and recycling of solar products. The Tempe, Arizona-based company employs thin-film semiconductor technology to achieve enhanced efficiency and sustainability in its solar modules.
First Solar is one of the companies expected to benefit after the Biden administration banned imports of polysilicon from Xinjiang, China, a region responsible for supplying ~45% of the world's solar-grade polysilicon, thanks to the company recently committing to building more solar panels in the United States.
Cowen analyst Jeff Osborne says the development is "a positive for First Solar" given the company does not use polysilicon and could lead to accelerating orders from utility-scale developers looking to avoid traceability issues in the future.
But that's just part of what makes this solar stock attractive right now.
Last month, First Solar committed to building a new 3GW per year panel factory in Ohio at a cost of $680M. The company says it seeks to "reshore" manufacturing that has moved outside the United States, bolstered by President Biden's ambitious clean energy goals. CEO Mark Widmar says the company's three Ohio plants combined would produce panels that could generate 6 GW of power annually by 2025, more than half of all solar panels the company estimates will be produced annually in the United States.
But here's another big reason why American solar stocks like First Solar are soaring: Solar tax credits.
While the Biden administration has not named solar yet as a manufacturing priority, it supports extending tax credits for solar panel purchases or to require federal contractors to purchase more solar panels from U.S. suppliers.
U.S. solar manufacturers are fully in support of the proposed tax credits saying they could boost domestic production of solar panels while also creating tens of thousands of new jobs.
First Solar has backed the tariffs saying they are essential to fight low-priced goods from abroad. However, industry specialists say tax credits are not enough, and hefty subsidies via tax breaks would be needed in addition to the tariffs to get the sector really going.
Finally, despite the recent Guggenheim downgrade, Bank of America still sees First Solar as being better-positioned to manage slumping imports than most crystalline silicon peers.
#3. NextEra Energy Partners, LP
Market Cap: $6.4B
YTD Returns: 24.9%
NextEra Energy Partners, L.P. (NYSE: NEP) is one of NextEra Energy's (NYSE:NEE) subsidiaries. NextEra Energy Partners owns interests in dozens of wind and solar projects in the United States., as well as natural gas infrastructure assets in Texas. These contracted projects use leading-edge technology to generate energy from the wind and the sun.
Although NEP recently posted dismal third-quarter earnings that missed both top-and bottom-line expectations, the company owns a high-quality portfolio of renewable assets and heavily contracted cash flow with a pipeline of assets through sponsor NextEra Energy which positions it for multiple years of double-digit distribution growth.
By Alex Kimani for Oilprice.com
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