The impressive growth in solar installations in the US and near-term forecasts showing a similar growth trend into 2024 should bode well for US solar stocks. However, California net billing transition, high interest rates, and China's dominance in solar panel manufacturing (leading to lower prices) may continue to negatively impact the near-term outlook. That said, the Inflation Control Act (IRA) benefits should remain a notable growth catalyst for US solar stocks. You can hold First Solar FSLR, Enphase Energy ENPH, and Nextracker NXT in your portfolio.
About the Industry
The Zacks Solar industry can be basically divided into two groups of companies. One group is involved in the design and manufacturing of highly efficient solar modules, panels and cells, while the other group is involved in the installation of the grid and in some cases the entire solar power system. This industry also includes a few companies that manufacture inverters for solar power systems that convert the sunlight from the modules into the electricity needed for the power grid. According to a Solar Energy Industries Association (SEIA) report issued in June 2024, photovoltaics (PV) accounted for 75% of the new generating capacity added to the U.S. grid in the first quarter of 2024. Thus, solar photovoltaics will continue to be the primary form of new generating capacity in the United States.
Three trends shaping the future of the solar industry
Record Solar Installations Boost Outlook: The US solar industry has seen a robust installation trend recently, driven by increased demand over the past few quarters. Evidently, as reported by SEIA, the US solar industry installed an impressive 11.8 gigawatts direct current (GWdc) of new solar capacity in the first quarter of 2024, bringing the total capacity in the country to 200 GW. This installation reflects a robust 93.4% increase from what was reported in the first quarter of 2023. The US is expected to see similar robust solar growth in the near future, with this energy source growing the fastest in the country. To this end, the US Energy Information Administration (EIA) expects solar to provide 41% more electricity in 2024 than in 2023. Such impressive forecasts point to a bright outlook for US solar stocks.
Inflation Control Act a Growth Catalyst: The historic Inflation Control Act (IRA), passed in August 2022, has proven to be a surefire growth catalyst for U.S. solar stocks. According to a Goldman Sachs Asset Management report, a total of 280 clean energy projects were announced in 44 U.S. states in the first year of the IRA, totaling $282 billion in investment. Going forward, the ruling is expected to be a major growth driver for the solar industry. Notably, SEIA predicts that the IRA will drive an additional 160 GW of solar power generation over the next decade compared to without the IRA. This should boost the growth trajectory of U.S. solar stocks.
Macroeconomic challenges could take a toll: Recent macroeconomic challenges in the U.S. economy have negatively impacted the solar industry. In particular, the residential solar sector shows signs of continuing to struggle due to rising interest rates, interconnection delays, and California's transition to Net Energy Metering 3.0. Notably, residential solar installations in the first quarter were down 25% year over year. Looking forward, according to SEIA's June 2024 report, California's net billing transition and rising interest rates are major headwinds, with residential solar installations expected to shrink 14% year over year in 2024.
China's dominance in solar module manufacturing is a major headwind for U.S. solar stocks. China accounts for about 80% of the world's module production capacity, and an oversupply of solar panels from the country has recently put significant downward pressure on module prices in the U.S. The oversupply is likely to cause prices of Chinese-finished solar panels to fall 42% in 2023, making Chinese-made panels more than 60% cheaper than U.S.-made equipment, Wood Mackenzie analyst Huayang Sun told Reuters. Thus, to remain competitive, U.S. solar module makers are also having to lower module prices, which hurts their profitability. With supply expected to continue to outstrip demand in 2024, there is little prospect of module prices rising. This could continue to have some negative impact on solar industry profitability for the foreseeable future.
The story continues
Zacks Industry Rank Reflects Gloomy Outlook
The Zacks Solar industry is a part of the broader Zacks Oil-Energy sector. It currently has a Zacks Industry Rank of #185, putting it in the Bottom 26% of all 250+ Zacks industries.
The group's Zacks Industry Rank, which is essentially the average of the Zacks Rank of all its member stocks, suggests a bleak near-term outlook. Our research shows that the top 50% of Zacks Rank industries outperform the bottom 50% by more than 2 to 1.
The industry, which ranks in the bottom 50% of the Zacks Rank, is seeing negative earnings outlooks across its constituent companies. Looking at the overall earnings estimate revisions, it appears that analysts have become less confident in this group’s earnings growth potential over the past few months. The industry’s current-year bottom line earnings estimate has fallen 14.6% since March 31st to 76 cents.
Before we dive into some solar stocks you might consider adding to your portfolio, let's take a look at the industry's recent stock market performance and valuation status.
The industry lags its sector and the S&P 500
The Solar Photovoltaic industry has underperformed both its sector and the Zacks S&P 500 Composite Index over the past year. Stocks in the industry have fallen a combined 42.5% over the past year, while the Oil-Energy sector has gained 9.4%. The Zacks S&P 500 Composite Index has risen 23.4% over the same period.
1-year price performance
Current Industry Assessment
Based on trailing 12-month EV/EBITDA, a ratio commonly used to value solar stocks, the solar industry is currently trading at 11.18x, compared with 20.11x for the S&P 500 and 3.22x for the sector.
As the chart below shows, over the past five years, stocks in this industry have traded at a high of 26.29x, a low of 9.47x, and a median of 11.17x.
EV-EBITDA ratio (last 12 months)
3 Solar Stocks to Watch
First Solar: Based in Tempe, Arizona, 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 June 4, 2024, First Solar announced that its Series 6 Plus and Series 7 TR1 products are the world's first photovoltaic (PV) solar modules to achieve EPEAT Climate+ certification, making FSLR's modules the first to meet the global standard of an ultra-low carbon threshold of less than 400 kg CO2e/kWp. This certification should increase demand for FSLR's modules.
The Zacks Consensus Estimate for First Solar's fiscal year 2024 revenue represents an improvement of 36.5% from the prior-year reported figure. The company has maintained a strong long-term (three-to-five-year) earnings growth rate of 56.2%. Currently, it has a Zacks Rank of #2 (Buy).
Price and consensus: FSLR
Nextracker: Based in San Jose, California, the company is a provider of intelligent, integrated solar trackers and software solutions used in utility-scale and distributed generation solar power plants. On June 20, 2024, Nextracker announced that it had acquired Ojjo, a US renewable energy company specializing in foundational technologies and services used in utility-scale ground-mounted applications for solar power generation, for approximately $119 million. The acquisition is expected to expand Nextracker's addressable market opportunity for challenging soil conditions by leveraging Ojjo's foundational technology expertise.
The Zacks Consensus Estimate for Nextracker's fiscal 2024 revenue represents an improvement of 14.6% from the prior-year reported figure. The stock has an average four-quarter earnings surprise of 78.83%. It currently carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Price and consensus: NXT
Enphase Energy: Based in Fremont, California, the company designs, develops, manufactures, and sells home energy solutions that connect energy generation, energy storage and control, and communications management into one intelligent platform. On July 8, 2024, Enphase announced it has begun shipping its U.S.-manufactured IQ8-3P commercial three-phase microinverter, which should further expand the company's strong position in the solar microinverter market.
The company boasts a long-term earnings growth rate of 17%. Enphase's ROE is 48.2%, above the industry average of 4.2%. The company currently sports a Zacks Rank #3 (Hold).
Price and consensus: ENPH
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