Chicago, IL – October 11, 2024 – Today, Zacks Equity Research First Solar FSLR, Enphase Energy ENPH and FTC Solar FTCI.
Link: https://www.zacks.com/commentary/2348178/3-solar-stocks-to-watch-buoyed-by-growing-installation-trend
Benefits from the Inflation Reduction Act (IRA) should continue to be a notable growth catalyst for U.S. solar stocks. However, fewer-than-expected reductions in interest rates, as well as China’s dominance in the field of solar panel manufacturing (leading to price decline), may hurt the near-term prospects.
Nevertheless, impressive solar installations in the United States, along with near-term projections reflecting a similar growth trend in 2024, should bode well for U.S. solar stocks. A few notable forerunners in this industry that solar investors may keep in their portfolio are First Solar, Enphase Energy and FTC Solar.
The Zacks Solar industry can be fundamentally segregated into two groups of companies. While one group 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 September 2024, photovoltaic (PV) solar accounted for 67% of the new electricity-generating capacity added to the U.S. grid in the first half of 2024. Hence, it continues to be the nation's dominant form of new generating capacity.
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 (EIA) expects the share of total U.S. electricity generation from solar to grow from 4% in 2023 to 5% in 2024. Such impressive projections are indicative of a bright outlook for U.S. solar stocks.
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 market with the certainty needed to boost expected solar deployment by 46% (in the next five years) 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, thanks to higher interest rates and the transition of California to net energy metering 3.0.
In the second quarter, residential solar installations declined 37% year over year, owing to California’s transition to net billing and high interest rates. Looking ahead, a year-over-year contraction of 19% is now anticipated in residential solar installations in 2024, with fewer interest rate cuts acting as one of the major headwinds, as per SEIA’s September 2024 report. This indicates a reduction of 5% in the residential solar market’s outlook for 2024.
China’s dominance in solar module manufacturing has proved to be another major headwind for U.S. solar stocks. With China accounting for about 80% of global module capacity, the oversupply of solar panels from the country has been putting significant downward pressure on module pricing in the United States in recent times.
Evidently, oversupply pushed prices of finished solar panels in China, down 42% in 2023, making Chinese panels more than 60% cheaper than U.S.-made equipment, per a statement made by Huaiyan Sun, an analyst at Wood Mackenzie, to Reuters. Therefore, to remain in the competition, the U.S. solar module manufacturers must have also lowered their module prices, thereby hampering their profitability.
With supply expected to still outweigh demand in 2024, there remains little hope for an increase in module prices. This, in turn, might continue to have some adverse impact on the profitability of the solar industry in the near future.
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #105, which places it in the top 42% 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.
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 8.3% in the past year, while the Oils-Energy sector grew 6.3%. The Zacks S&P 500 composite has surged 31% in the same time frame.
On the basis of a trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 10.65X compared with the S&P 500’s 18.99X and the sector’s 3.36X.
Over the past five years, the industry has traded as high as 47.44X, as low as 8.50X and at the median of 24.56X.
FTC Solar: Based in Austin, TX, the company provides solar tracker systems, technology, software and engineering services. On Sept. 10, 2024, FTC Solar announced that it has been selected by Strata Clean Energy (Strata) to supply approximately 500 MW of its Voyager 2P solar tracker technology for multiple project sites in the United States.
Per the terms of the agreement, FTCI will be the preferred 2P solar tracker supplier over a three-year initial term, which could expand to over a gigawatt of volume. Successful delivery of the Voyager 2P solar tracker technology should boost FTCI’s future revenues.
The Zacks Consensus Estimate for FTC Solar’s 2024 earnings estimate has improved over the past 60 days. The Zacks Consensus Estimate for FTCI’s 2025 sales indicates an improvement of 80% from the prior-year reported figure. It currently carries a Zacks Rank #2 (Buy).
First Solar: Based in Tempe, AZ, the company is the world’s largest thin-film PV solar module manufacturer and the largest PV solar module manufacturer in the Western Hemisphere. On Sept. 6, 2024, First Solar inaugurated its new $1.1 billion fully vertically integrated thin-film solar manufacturing facility in Lawrence County, AL. The facility is expected to add 3.5 gigawatts (GW) to FSLR’s nameplate solar manufacturing capacity in the United States.
The Zacks Consensus Estimate for First Solar’s 2024 sales indicates an improvement of 34.8% from the prior-year reported figure. The company holds a solid long-term (three-to-five years) earnings growth rate of 43.7%. It currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enphase Energy: Based in Fremont, CA, the company designs, develops, manufactures and sells home energy solutions, which connect energy generation, energy storage and control and communications management on one intelligent platform. On Oct. 3, 2024, Enphase Energy announced the launch of its IQ8X Microinverters in Australia. This should boost ENPH’s footprint in the global solar market.
The company boasts a long-term earnings growth rate of 15.9%. Enphase’s return-on-equity is 33.86% compared with the industry’s average of 4.39%. The company currently carries a Zacks Rank #3.
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