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3 Solar Stocks to Watch Amid Bleak Residential Installation View
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The Inflation Reduction Act (IRA) benefits have been proven to be a solid growth catalyst for U.S. solar stocks, with the policy expected to drive an additional 160 gigawatts (GW) of solar over the next 10 years when compared to a no-IRA scenario. This should bode well for U.S. solar stocks. However, the continued softness projected in residential installations might continue to hurt their near-term prospects to some extent. Nevertheless, considering the impressive projections for solar capacity additions in the United States during 2024, investors might keep Enphase Energy (ENPH - Free Report) , Nextracker (NXT - Free Report) and Canadian Solar (CSIQ - Free Report) on their watchlist.
About the Industry
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 set 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 Solar Energy Industries Association (SEIA) published in March 2024, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time in the United States.
3 Trends Shaping the Future of the Solar Industry
Record Solar Installations Boost Prospects: With growing demand over the past few quarters, the U.S. solar industry has been witnessing a solid upside in recent times, overcoming the adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend in the nation. For instance, as reported by SEIA, the U.S. solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, which reflected a solid 51% increase from that reported in 2022. We expect to witness similar robust solar growth in the United States going forward. To this end, the U.S. Energy Information Administration (EIA) expects solar power to be the leading source of growth in U.S. electricity generation in 2024, with 36.4 GW of new solar capacity projected to be added to the grid. Such impressive projections are indicative of a bright outlook for U.S. solar stocks.
Inflation Reduction Act to be Growth Catalyst: The historic Inflation Reduction Act (IRA) passed by the U.S. Senate in August 2022, has been proven to be a solid growth catalyst for U.S. solar stocks. Evidently, in the year since the IRA passed, solar module manufacturers have announced approximately three dozen capacity additions, per a report by SEIA. Looking ahead, this ruling by the Biden administration is expected to be a major growth driver for the solar industry. As part of this Act, for the first time, the U.S. solar industry has access to production tax credits and an investment tax credit for domestic manufacturing across the solar value chain. Notably, SEIA projects that the IRA should drive an additional 160 GW of solar over the next 10 years when compared to a no-IRA scenario. 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, a trend we may expect to continue in the near future as well. In particular, the residential solar space has been reflecting signs of continued struggles, thanks to higher interest rates, interconnection delays and permitting challenges. Wood Mackenzie has forecasted a 13% contraction for the residential U.S. solar market in 2024, with installation volumes reflecting the adverse impacts of high-interest rates and California’s net billing transition. Moreover, imbalances in global solar module supply and demand, primarily driven by excess manufacturing capacity in China, have been putting significant downward pressure on module pricing in the United States. 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 Wood Mackenzie analyst Huaiyan Sun to Reuters. Therefore, to remain in competition, the U.S. solar module manufacturers must have also lowered their module prices, thereby impacting 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.
Zacks Industry Rank Reflects Bleak Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #165, which places it in the bottom 35% 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 bleak 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 over the past few months. The industry’s bottom-line estimate for the current fiscal year has moved down 31.1% to $1.19 since Jan 31.
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 46.3% in the past year, while the Oils-Energy sector grew 12.8%. The Zacks S&P 500 Composite has surged 25.8% 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 10.67X compared with the S&P 500’s 14.67X and the sector’s 3.05X.
Over the last five years, the industry has traded as high as 30.52X, as low as 9.37X and at the median of 12.20X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
Nextracker: Based in San Jose, 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 Apr 26, 2024, Nextracker announced that it (along with JM Steel) has completed a major expansion of Nextracker-dedicated manufacturing lines of JM Steel’s Leetsdale steel facility, achieving 4 GW of capacity. Inaugurated and reopened in 2022, the facility manufactures steel components for Nextracker solar trackers installed on dozens of active solar power projects that employ thousands of construction workers across multiple states in the Midwest region. This should boost NXT’s position in the construction of solar energy projects in the United States.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 28.7% from the prior-year reported figure. The company holds a long-term earnings growth rate of 46.7%. It currently sports a Zacks Rank #1 (Strong 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 Apr 15, 2024, Canadian Solar announced that its subsidiary, Recurrent Energy, has secured 343 million Brazilian reais (approximately $70 million) of non-recourse project financing from Banco do Nordeste do Brasil S.A. (BNB) for its Jaiba III solar project in Brazil. On completion of construction, which is expected to happen in the fourth quarter of 2024, Jaiba III project should displace approximately 150,000 tons of carbon dioxide annually. This should bolster CSIQ’s solar project portfolio.
The Zacks Consensus Estimate for the company’s 2024 sales indicates an improvement of 16.3% from the prior-year reported figure. CSIQ has a long-term earnings growth rate of 25%. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CSIQ
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 Apr 22, 2024, Enphase Energy announced a new strategic relationship with global energy and tech company, Octopus Energy Group. Under the partnership, the two companies will focus on deploying Enphase IQ8 Microinverters and IQ Battery 5P in the United Kingdom. This should boost ENPH’s revenues from the international market.
The company boasts a long-term earnings growth rate of 17.4%. Enphase Energy’s return-on-equity is 48.2% compared with the industry’s average of 4.1%. The company currently carries a Zacks Rank #3.
Price & Consensus: ENPH
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3 Solar Stocks to Watch Amid Bleak Residential Installation View
The Inflation Reduction Act (IRA) benefits have been proven to be a solid growth catalyst for U.S. solar stocks, with the policy expected to drive an additional 160 gigawatts (GW) of solar over the next 10 years when compared to a no-IRA scenario. This should bode well for U.S. solar stocks. However, the continued softness projected in residential installations might continue to hurt their near-term prospects to some extent. Nevertheless, considering the impressive projections for solar capacity additions in the United States during 2024, investors might keep Enphase Energy (ENPH - Free Report) , Nextracker (NXT - Free Report) and Canadian Solar (CSIQ - Free Report) on their watchlist.
About the Industry
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 set 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 Solar Energy Industries Association (SEIA) published in March 2024, photovoltaic (PV) solar accounted for 53% of all new electricity-generating capacity additions in 2023, making up more than half of new generating capacity for the first time in the United States.
3 Trends Shaping the Future of the Solar Industry
Record Solar Installations Boost Prospects: With growing demand over the past few quarters, the U.S. solar industry has been witnessing a solid upside in recent times, overcoming the adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend in the nation. For instance, as reported by SEIA, the U.S. solar industry installed 32.4 gigawatts-direct current (GWdc) of capacity in 2023, which reflected a solid 51% increase from that reported in 2022. We expect to witness similar robust solar growth in the United States going forward. To this end, the U.S. Energy Information Administration (EIA) expects solar power to be the leading source of growth in U.S. electricity generation in 2024, with 36.4 GW of new solar capacity projected to be added to the grid. Such impressive projections are indicative of a bright outlook for U.S. solar stocks.
Inflation Reduction Act to be Growth Catalyst: The historic Inflation Reduction Act (IRA) passed by the U.S. Senate in August 2022, has been proven to be a solid growth catalyst for U.S. solar stocks. Evidently, in the year since the IRA passed, solar module manufacturers have announced approximately three dozen capacity additions, per a report by SEIA. Looking ahead, this ruling by the Biden administration is expected to be a major growth driver for the solar industry. As part of this Act, for the first time, the U.S. solar industry has access to production tax credits and an investment tax credit for domestic manufacturing across the solar value chain. Notably, SEIA projects that the IRA should drive an additional 160 GW of solar over the next 10 years when compared to a no-IRA scenario. 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, a trend we may expect to continue in the near future as well. In particular, the residential solar space has been reflecting signs of continued struggles, thanks to higher interest rates, interconnection delays and permitting challenges. Wood Mackenzie has forecasted a 13% contraction for the residential U.S. solar market in 2024, with installation volumes reflecting the adverse impacts of high-interest rates and California’s net billing transition. Moreover, imbalances in global solar module supply and demand, primarily driven by excess manufacturing capacity in China, have been putting significant downward pressure on module pricing in the United States. 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 Wood Mackenzie analyst Huaiyan Sun to Reuters. Therefore, to remain in competition, the U.S. solar module manufacturers must have also lowered their module prices, thereby impacting 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.
Zacks Industry Rank Reflects Bleak Outlook
The Zacks Solar industry is housed within the broader Zacks Oils-Energy sector. It currently carries a Zacks Industry Rank #165, which places it in the bottom 35% 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 bleak 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 over the past few months. The industry’s bottom-line estimate for the current fiscal year has moved down 31.1% to $1.19 since Jan 31.
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 46.3% in the past year, while the Oils-Energy sector grew 12.8%. The Zacks S&P 500 Composite has surged 25.8% 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 10.67X compared with the S&P 500’s 14.67X and the sector’s 3.05X.
Over the last five years, the industry has traded as high as 30.52X, as low as 9.37X and at the median of 12.20X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
Nextracker: Based in San Jose, 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 Apr 26, 2024, Nextracker announced that it (along with JM Steel) has completed a major expansion of Nextracker-dedicated manufacturing lines of JM Steel’s Leetsdale steel facility, achieving 4 GW of capacity. Inaugurated and reopened in 2022, the facility manufactures steel components for Nextracker solar trackers installed on dozens of active solar power projects that employ thousands of construction workers across multiple states in the Midwest region. This should boost NXT’s position in the construction of solar energy projects in the United States.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 28.7% from the prior-year reported figure. The company holds a long-term earnings growth rate of 46.7%. It currently sports a Zacks Rank #1 (Strong 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 Apr 15, 2024, Canadian Solar announced that its subsidiary, Recurrent Energy, has secured 343 million Brazilian reais (approximately $70 million) of non-recourse project financing from Banco do Nordeste do Brasil S.A. (BNB) for its Jaiba III solar project in Brazil. On completion of construction, which is expected to happen in the fourth quarter of 2024, Jaiba III project should displace approximately 150,000 tons of carbon dioxide annually. This should bolster CSIQ’s solar project portfolio.
The Zacks Consensus Estimate for the company’s 2024 sales indicates an improvement of 16.3% from the prior-year reported figure. CSIQ has a long-term earnings growth rate of 25%. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CSIQ
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 Apr 22, 2024, Enphase Energy announced a new strategic relationship with global energy and tech company, Octopus Energy Group. Under the partnership, the two companies will focus on deploying Enphase IQ8 Microinverters and IQ Battery 5P in the United Kingdom. This should boost ENPH’s revenues from the international market.
The company boasts a long-term earnings growth rate of 17.4%. Enphase Energy’s return-on-equity is 48.2% compared with the industry’s average of 4.1%. The company currently carries a Zacks Rank #3.
Price & Consensus: ENPH