Solar energy stocks offer investments in a clean, renewable, and abundant resource while the solar energy market is experiencing both organic and state subsidized growth. In our analysis, we filtered through the solar industry and selected companies with a mix of innovation and growth potential. We focused on quality companies that you can put on your watchlist, but their equity has different risk profiles and should be examined individually.
There are roughly three ways to invest in solar: decentralized residential systems, innovation alpha, and industrial solar electricity production. The companies in this collection are a mix of these categories as we aimed to prepare a balanced list.
In the grand scheme of things, solar is a small part of the electricity market. Electricity consumption in the U.S. was around 3.94 terawatts (TW, equal to 1000 gigawatt/GW) in 2021, with solar making up 71GW or 1.8%. The fastest way to supercharge solar generation is with decentralized installations that have a two-way connection to a grid. This means that it is much more effective if people manage to turn solar power into a profitable home investment, instead of relying on companies to build large solar farms. However, there are soft - regulatory and cultural bottlenecks in this vision, as well as the hard bottleneck of sustainable lithium-ion battery production.
Initiatives like the Inflation Reduction Act of 2022 (IRA) intend to spur renewable energy growth, allowing both adopters and investors to benefit. The program allocates US$369 billion to renewables, aimed to produce 155 gigawatts of additional solar and wind energy capacity in the U.S. by 2030 - equating to a 35% boost for utility-scale solar photovoltaics. Investors in this field are also supported by the US senate, which aims to deliver US$60 billion in subsidies to clean energy companies, and US$280 billion subsidies from the chips act.
A common misconception for solar power is that it needs to be closer to the equator because the temperature is warmer, however solar panels need sun hours, not heat, which means that panes will be effective as long as there is sunlight exposure, even if they are located in colder regions like Canada, giving the technology a wider reach.
Analyst’s Notes
The most recent catalyst to dramatically accelerate the growth of the solar industry is the Inflation Reduction Act of 2022. With it, US$369 billion is being allocated to U.S. renewables. The Renewable Energy Subsidy program would boost renewable infrastructure with 155 gigawatts of additional solar and wind energy capacity in the U.S. by 2030 - Equating to a 35% boost for utility-scale solar photovoltaics.
Before the bill, the U.S. was on track to have cumulative totals of nearly 200 GW solar. Now, with the expansion of renewable energy tax credits under the law, the 2030 total is expected to be 270 GW.
Utility-scale solar capacity (excluding home installations) in the U.S. at the beginning of this year stood at about 71 GW, so the expected increase to 270 GW would mean a near-quadrupling of capacity by the end of the decade.
The U.S. currently has approximately 11 gigawatts of photovoltaic module production capacity, according to consultancy Wood Mackenzie, out of a global capacity approaching 500 gigawatts as of 2021. China is home to 70 to 98 percent of the world’s production capacity for the silicon-based materials and components in PV panels, according to S&P Global. China has invested more than US$50 billion in solar PV manufacturing capacity since 2011, the International Energy Agency recently reported.
As Canary Media’s Jeff St. John recently explained, "This could offer solar projects a potentially more lucrative tax credit value since the cost of solar projects is declining compared to the value of the electricity they will produce over time."
5 companies
Array Technologies, Inc. manufactures and sells ground-mounting tracking systems used in solar energy projects in the United States, Spain, Brazil, Australia, and internationally.
Why ARRY?
Maximising solar effectiveness with innovative tech
Imagine a company that has a patented technology, making solar panels rotate to maximize sun exposure. This is essentially what Array Technologies Inc. produces and the innovation alpha is what makes it attractive to investors.
Array is a leading provider of solar tracking solutions. Its products are used in a variety of applications, including utility-scale solar power plants, commercial and industrial solar installations, and residential solar systems. The company is seeing an influx in demand, given the energy optimization potential.
Array’s intellectual rights give the company an edge in the industry and makes their product more cost-effective against competitors: "Our trackers use a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on our U.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable."
Array Technologies is a leading player in solar tracking, with a market share of about 20%. The company’s products are used in some of the largest solar power plants in the world, including the 550 MW Topaz Solar Farm in California and the 300 MW Agua Caliente Solar Project in Arizona. Array has also been selected as the tracker supplier for several large projects in development, including the 1 GW Solar Star project in California and the 700 MW Desert Sunlight project in California.
Investors that want to capitalize on patented innovation that boosts the energy generation of solar panels can consider Array.
Rewards
Trading at 41.9% below our estimate of its fair value
Earnings are forecast to grow 21.7% per year
Became profitable this year
Risks
Has a high level of debt
SolarEdge Technologies, Inc., together with its subsidiaries, designs, develops, manufactures, and sells direct current (DC) optimized inverter systems for solar photovoltaic (PV) installations in the United States, Germany, the Netherlands, Italy, rest of Europe, and internationally.
Why SEDG?
Residential solar company expanding its production capacity
SolarEdge focuses on the residential solar market. The company’s value proposition is that decentralized energy systems are more effective in the shift to renewables when paired with smart battery systems that optimize energy savings while allowing residents to resell electricity back to the main grid. These systems are currently targeted at middle-high income families in developed economies, but have the potential to spread globally as production capacity increases.
The company is a leading provider of solar power optimizers and inverters. Their products are used in residential, commercial, and utility-scale solar installations around the world.
SolarEdge has invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (PV) system. The SolarEdge DC optimizer inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system.
The majority of revenues come from the U.S. and Europe, and the company is reliant on a few partners such as Samsung SDI for its supply of lithium-ion batteries, which sometimes leads to delays in supply for the end-users. SolarEdge is opening its new "Stella 2" battery manufacturing plant in South Korea in order to increase its growth capacity.
SolarEdge’s products are designed to maximize the power output of solar panels, and their inverters are some of the most efficient on the market.
Since beginning commercial shipments in 2010, SolarEdge has shipped over 31.6 Gigawatt of its DC optimized inverter systems and its products have been installed in solar PV systems in 133 countries. They’ve been profitable for the last four years, and revenue has been growing steadily.
Investors that want to widen their renewable portfolio with a business that produces the power and battery systems for solar panels can review SolarEdge.
Rewards
Trading at 41.3% below our estimate of its fair value
Earnings are forecast to grow 39.15% per year
Risks
Profit margins (1.2%) are lower than last year (3%)
Large one-off items impacting financial results
Volatile share price over the past 3 months
Enphase Energy, Inc., together with its subsidiaries, designs, develops, manufactures, and sells home energy solutions for the solar photovoltaic industry in the United States and internationally.
Why ENPH?
Empowering residential customers to generate, manage and store their own solar energy
Enphase connects solar generation, storage, and energy management on one intelligent platform for home solar energy systems in the United States and internationally. The company’s strong point is the innovation in semiconductor-based micro-inverters, which converts energy at the individual solar module level. While most people think of solar panels and batteries when they hear solar, inverters or in this case - microinverters, are a large chunk of the infrastructure needed to set up a solar energy system.
The company shipped over 39 million micro-inverters in over 1.7 million systems across 130 countries. They are also positioned in an expanding market. For solar micro-inverters, Enphase estimates (p. 18) the serviceable market to be US$6.2 billion in the residential segment by 2025, and US$2 billion in the commercial segment. For electricity storage, it estimates a US$4.5 billion serviceable market, and for portable energy systems it forecasts a market of US$2.5 billion by 2025. Together, these segments excluding addons, account for a serviceable market of US$15.2 billion by 2025 - and analysts’ forecasts reveal that they expect the company to capture US$3.9 billion or 26% of that market.
The value proposition for distributed power architecture is that the most effective place to generate electricity is close to the area of consumption. Enphase allows homes to generate as well as distribute excess electricity locally. Should they continue to penetrate the residential market, the company should expect handy top and bottom line , continuing the trend they’ve carried on for the last few quarters.
Enphase also has an investment in Upstart Power and are using their fuel cells as an add-on offering together with their latest generation IQ8 micro-inverters.
While Enphase is a large market player in the solar power industry, investors should get familiar with the company and check if the fundamentals justify the current stock price. According to Simply Wall St’s analysis, it appears the past performance, future prospects and financial health all look very strong, but the valuation and insider sales might be areas of concern.
Rewards
Trading at 27.9% below our estimate of its fair value
Earnings are forecast to grow 27.97% per year
Risks
No risks detected for ENPH from our risks checks.
SunPower Corporation, a solar technology and energy services provider, offers solar, storage, and home energy solutions primarily in the United States and Canada.
Why SPWR?
Residential solar company partnering with EV manufacturers
SunPower Corporation offers solar, storage, and home energy solutions to customers primarily in the United States and Canada. The company focuses on a complete solar roofing solution for residential clients. SunPower is a subsidiary of TotalEnergies.
SunPower is one of the larger providers with around 75k expected clients for 2022. The company has around 10% U.S. market share in the residential solar segment and expects to incrementally grow its client base by 20k annually.
The company is also entering the (EV) space as a preferred partner for General Motors (NYSE:GM), which makes SunPower a preferred EV charger installation provider and GM’s exclusive solar provider. As EVs can be charged at home, SunPower aims to provide renewable solutions for charging that will work with GM’s EVs such as the Chevrolet Silverado EV, which is expected to launch in the fall of 2023.
The company stands to benefit from the Inflation Reduction Act (IRA) which was signed on August 16, 2022. The IRA allows qualifying homeowners to credit 30% of the cost of the solar or solar paired battery storage system from their U.S. federal income taxes. The tax credits will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034, and further reduce to 0% or 10% after the end of 2034. This is likely to spur residential solar installations and increase the value of companies like SunPower. Incentives like this will assist with customer acquisition and in turn, provide a healthy boost to residential segment clients as the prospect of securing a complete solar system before the tax credits decline is too alluring.
In 2021 SunPower moved to optimize operations by implementing a restructuring and closed their manufacturing plant in Hillsboro, Oregon. They also reduced their principal debt balance and paid off 2 outstanding loans, totaling $92.5 million.
Investors that want to hold a residential solar roofing system company in their portfolio can explore SunPower.
Rewards
Trading at 55.8% below our estimate of its fair value
Earnings are forecast to grow 74.73% per year
Risks
Volatile share price over the past 3 months
NextEra Energy Partners, LP acquires, owns, and manages contracted clean energy projects in the United States.
Why NEP?
Yieldco providing diversified asset exposure in the solar space
NextEra Energy Partners, LP is a yieldco (structured for dividends) that owns a contracted portfolio of wind and solar projects, as well as contracted natural gas pipeline assets. The business is positioned to take advantage of the favorable long-term trends in the renewable energy industry, boosted both by organic demand and government subsidies.
The business strategy is to generate long-term, predictable cash flows by investing in a diversified portfolio of contracted renewable energy assets, including wind and solar projects. NextEra Energy Partners is one of the largest renewable energy yieldcos in the world, with a diversified portfolio of nearly 2.3 gigawatts of wind and solar projects across the United States, and a signed backlog of 20 additional GW of future infrastructure.
NextEra Energy Partners is a growth-oriented limited partnership formed by NextEra Energy, Inc. (NYSE:NEE), a large cap energy utility company with operations and investments throughout the United States.
Investors interested in industrial grade solar projects, can look into NextEra Energy.
Rewards
Trading at 55.4% below our estimate of its fair value
Earnings are forecast to grow 36.66% per year
Risks
Debt is not well covered by operating cash flow
Shareholders have been diluted in the past year
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned.