Steadily growing solar installations in the United States, along with near-term projections reflecting a similar growth trend in 2025, should bode well for U.S. solar stocks. However, China’s dominance in the field of solar panel manufacturing (leading to price decline), along with the dismal expectation for the residential segment, may hurt the industry’s near-term prospects. Nevertheless, solid investments arising from the Inflation Reduction Act should continue to be a notable growth catalyst for the stocks. A few prominent forerunners in this industry that solar investors may keep in their portfolio are Enphase Energy ENPH, Nextracker NXT and Canadian Solar CSIQ.
About the Industry
The Zacks Solar industry can be fundamentally segregated into two groups of companies. While one is involved in designing and producing high-efficiency solar modules, panels and cells, the other is engaged in installing grids and, in some cases, entire solar power systems. The industry also includes a handful of companies that manufacture inverters for solar power systems, which convert solar power from modules into electricity required by electric grids. Per a report by the Solar Energy Industries Association (“SEIA”), published in December 2024, photovoltaic (PV) solar accounted for 64% of the new electricity-generating capacity added to the U.S. grid through the third quarter of 2024. Hence, it continues to be the nation's dominant form of new generating capacity.
3 Trends Shaping the Future of the Solar Industry
Record Solar Installations Boost Prospects: The U.S. solar industry has been witnessing a solid installation trend lately. As reported by SEIA, the U.S. solar industry installed an impressive 8.6 gigawatts-direct current (GWdc) of new solar capacity in the third quarter of 2024, reflecting a solid 21% year-over-year increase. We expect to witness similar robust solar growth in the United States in the near term as well. To this end, the U.S. Energy Information Administration expects a solid 25 GW of solar generation capacity to come online in 2025. This will cause the nation’s total solar generation capacity to reach 153 GW in 2025 from 128 GW anticipated for 2024. Such impressive projections are indicative of a bright outlook for U.S. solar stocks.
Inflation Reduction Act to be a Growth Catalyst: The historic Inflation Reduction Act (IRA), passed in August 2022, has been a solid growth catalyst for U.S. solar stocks. Following the act’s passage, from the second half of 2022 to the first half of 2024, actual investment in clean energy technologies and infrastructure improved a solid 71% to $493 billion (as per the Clean Investment Monitor Report). Such a significant investment volume benefited the solar industry, with utility-scale solar investments having increased 56% from its pre-IRA levels. Looking ahead, this ruling is expected to be a major growth driver for the solar industry. To this end, SEIA stated that the long-term tax incentives and manufacturing provisions in the IRA provide the certainty needed to boost expected solar deployment by more than 40% (from 2027 to 2032) compared to pre-IRA projections. This, in turn, should boost U.S. solar stocks’ growth trajectory.
Macroeconomic Challenges Might Hurt: Recent macroeconomic challenges in the U.S. economy have been negatively impacting the solar industry. In particular, the residential solar space has been reflecting signs of continued struggles over the past couple of quarters. Keeping up with this trend, in the third quarter of 2024, residential solar installations in the United States tanked 39% year over year due to elevated interest rates and poor demand owing to customer uncertainty. Looking ahead, SEIA projects growth in the residential solar segment to remain flat in the next five years due to multiple issues like broader power sector challenges, a lack of labor availability, high voltage equipment constraints and interconnection delays.
China’s dominance in solar module manufacturing has proved to be another major headwind for U.S. solar stocks. With China accounting for over 80% of global module capacity, solar panels' oversupply from the country has been putting significant downward pressure on module pricing in the United States in recent times. As a result, U.S. module manufacturers are facing a cost competitiveness challenge, with solar PV manufacturing costs in China being 20% lower than in the United States (as per a report by the International Energy Agency). While America is making efforts to support its domestic solar module industry, it is difficult to compete against such cheaper modules offered by China. It might have some adverse impact on the profitability of the U.S. solar industry in the near future.
Zacks Industry Rank Reflects Bright Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #75, which places it in the top 30% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few solar stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The solar industry has underperformed both its sector and the Zacks S&P 500 composite over the past year. The stocks in this industry have collectively lost 30.3% in the past year, while the Oils-Energy sector grew 4%. The Zacks S&P 500 composite has surged 24.4% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of a trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 12.90X compared with the S&P 500’s 18.32X and the sector’s 3.36X.
Over the past five years, the industry has traded as high as 48.69X, as low as 8.81X and at the median of 25.63X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
Nextracker: Based in Fremont, CA, the company is a provider of intelligent, integrated solar tracker and software solutions used in utility-scale and distributed generation solar power plants. On Dec. 10, 2024, Nextracker announced that it has shipped and delivered the industry’s first U.S.-manufactured solar trackers in the United States, which are expected to achieve 100% domestic content value for solar trackers under the IRA. This supply-chain localization milestone reaffirms Nextracker’s commitment to American manufacturing and jobs, while providing operational excellence for customers and partners.
The Zacks Consensus Estimate for NXT’s fiscal 2025 earnings estimate has improved 1.9% over the past 90 days. The Zacks Consensus Estimate for its fiscal 2025 sales indicates an improvement of 14.2% from the prior-year reported figure. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: NXT
Canadian Solar: Based in Ontario, Canada, the company is a leading manufacturer of solar photovoltaic modules and a provider of solar energy and battery energy storage solutions. On Dec. 12, 2024, Canadian Solar announced that it has executed three significant agreements with Sunraycer Renewables, an Annapolis, MD-based renewable energy platform. Per this agreement, e-STORAGE, Canadian Solar's subsidiary specializing in the design, manufacturing, and integration of battery energy storage systems, will deliver 188 MWh DC to the Gaia project, located in Navarro County, and the 127 MWh DC Midpoint project in Hill County.
The Zacks Consensus Estimate for Canadian Solar’s 2025 sales indicates an improvement of 21.2% from the prior-year estimated figure. The company holds a solid long-term (three-to-five years) earnings growth rate of 25%. It currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: CSIQ
Enphase Energy: Based in Fremont, CA, the company designs, develops, manufactures and sells home energy solutions that connect energy generation, energy storage and control and communications management on one intelligent platform. On Dec. 17, 2024, Enphase Energy announced initial shipments of its most powerful home battery to date, the IQ Battery 5P, for customers in India. This should boost ENPH’s footprint in the global solar market.
The company boasts a long-term earnings growth rate of 3.6%. The Zacks Consensus Estimate for its 2025 sales indicates an improvement of 27.7% from the prior-year estimated figure. The company currently carries a Zacks Rank #3.
Price & Consensus: ENPH
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