Record solar installations witnessed across the United States in recent times have set the stage for U.S. solar stocks’ growth. Also, encouraging corporate investments have been boosting the prospects of U.S. solar stocks. However, the lack of U.S. policies and possible revoking of section 201 remain concerns for the long-term growth of solar companies. Considering the fact that the solar industry is expected to account for almost half of the planned 2022 electric capacity additions in the country, not all hopes are lost for U.S. solar stocks. The forerunners in the U.S. solar industry are Enphase Energy ENPH, First Solar FSLR and ReneSola SOL.
About the Industry
The Zacks Solar industry can be fundamentally segregated into two sets of companies. While one group is involved in the designing and production of high-efficiency solar modules, panels, and cells, the other set is engaged in the installation of 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. Buoyed by robust installation trends, solar accounted for 43% of all new electricity-generating capacity added in the United States in 2020, per a report by Solar Energy Industries Association (SEIA). This represents solar’s largest-ever share of new generating capacity. It ranked first among all technologies for the second year in a row.
3 Trends Shaping the Future of the Solar Industry
Record Solar Installations Boost Prospects: With growing demand over the past couple of quarters, the U.S. solar industry has been witnessing a solid upside, thereby overcoming the initial adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend prevalent in the nation. For instance, as reported by SEIA, the U.S. solar market installed 5.4 gigawatts-direct current (GWdc) of solar capacity in the third quarter of 2021, reflecting a solid 33% increase from the third quarter of 2020 and leading to record Q3 installations. We expect to witness similar robust solar growth in the United States going forward. U.S. Energy Information forecasts solar to account for almost half of the planned 2022 electric capacity additions in the United States. Such impressive projections are indicative of the bright outlook for U.S. solar stocks.
Lack of Policy & Adverse Ruling Might Hurt: With the cost of solar installation declining more than 70% in the last decade and demand once again on its usual track, it is high time that the U.S. government undertakes advance policies to promote long-lasting growth of the industry. A report by the SEIA forecasts that the industry will fall short of the targets to slash CO2 emissions and reach 100% clean energy by 2035 unless growth-promoting policies are enacted and implemented by Congress. Moreover, in January 2022, the U.S. Department of Justice appealed to the U.S. Court of International Trade's Section 201 ruling that struck down the Trump administration’s efforts to raise solar tariffs. If the Court of International Trade rules in favor of the Justice Department it will be detrimental for the solar industry. Raising the solar import tariff will push up the cost of installations, thereby hampering solar stocks’ growth trajectory.
Corporate Investments to Boost Solar Stocks: Rapidly increasing corporate investments in solar energy have been boosting the U.S. solar market. From rooftop systems for local hardware stores to solar parking canopies supporting corporate headquarters to large solar installations powering data centers, solar installations are as diverse and varied as the companies offering them. Notably, data from Renewable Energy Buyers Alliance (REBA) show that corporate purchases of clean power in the United States rose to a record 10.6 GW last year. In particular, tech giants are leading the way in terms of corporate investments in clean energy, including solar, with Amazon being the forerunner. Although the pandemic-led crisis initially brought solar installation activities to a temporary halt, soaring demand for carbon-free power has once again instilled growth. So, there is already a gradual recovery in industry trends, which will accelerate once the COVID-19 risk subsides, thereby attracting increased corporate investments.
Zacks Industry Rank Reflects Grim Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #188, which places it in the bottom 26% 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 gloomy 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate.
Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential in recent times. The industry’s earnings estimates for the current fiscal year have gone down by 10.5% since Oct 31.
Before we present a few alternative energy 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 S&P 500 & Sector
The Solar Industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively lost 50.8% while the Oils-Energy Sector and the Zacks S&P 500 composite have rallied 27.4% and 19.3%, respectively in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 28.89X compared with the S&P 500’s 15.39X and the sector’s 4.87X.
Over the last five years, the industry has traded as high as 88.30X, as low as 28.89X, and at the median of 40.61X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
Enphase Energy: Based in Fermont, CA, Enphase designs, develops, manufactures and sells home energy solutions, while microinverters remain this company’s legacy product. At the onset of the fourth quarter of 2021, the company introduced an all-in-one Enphase Energy System with IQ8 solar microinverters for customers in North America. With IQ8 being Enphase's smartest microinverter, so far, this launch surely expands the revenue growth prospects of the company in the United States.
The Zacks Consensus Estimate for Enphase’s 2022 earnings has improved 15.2% over the past 90 days. ENPH boasts a four-quarter earnings surprise of 29.49% on average. The company 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: ENPH
First Solar: Based in Tempe, AZ, First Solar is a leading global provider of comprehensive PV solar energy solutions and specializes in designing, manufacturing, and selling solar electric power modules. The company announced plans to expand its manufacturing capacity by 6.6 GW by constructing its third U.S. manufacturing facility in Ohio. This should enable First Solar to maintain its position as the largest U.S. solar module manufacturer.
First Solar currently boasts a solid long-term earnings growth rate of 10.8%. FSLR has a four-quarter earnings surprise of 19.01% on average. The company currently carries a Zacks Rank #3.
Price & Consensus: FSLR
ReneSola: Based in Stamford, CT, ReneSola is a solar project developer and operator, with robust pipeline projects worldwide. The United States continues to be a large and lucrative market for ReneSola. As of Sep 30, 2021, the company had mid-to-late-stage projects of 464 MW in the United States.
The Zacks Consensus Estimate for ReneSola’s 2022 earnings indicates an improvement of 39% from the prior-year estimated figure. SOL boasts a four-quarter earnings surprise of 127.50% on average. The company currently carries a Zacks Rank #3
Price & Consensus: SOL
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