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3 Solar Stocks to Watch as Interest Rates Remain High
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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. However, California’s net billing transition, high interest rates as well as China’s dominance in solar panel manufacturing (leading to price decline) may keep hurting their near-term prospects. Nevertheless, benefits from the Inflation Reduction Act (IRA) should continue to be a notable growth catalyst for U.S. solar stocks. One may keep First Solar (FSLR - Free Report) , Enphase Energy (ENPH - Free Report) and Nextracker (NXT - Free Report) in their portfolio.
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 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 June 2024, photovoltaic (PV) solar accounted for 75% of the new electricity-generating capacity added to the U.S. grid in the first quarter of 2024. Hence, it continues to be the dominant form of new generating capacity in the nation.
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 installation trend lately. Evidently, as reported by SEIA, the U.S. solar industry installed an impressive 11.8 gigawatts-direct current (GWdc) of new solar capacity in the first quarter of 2024, thereby bringing the total capacity to 200 GW in the nation. This installation reflects a solid 93.4% increase from that reported in the first quarter of 2023. We expect to witness similar robust solar growth in the United States in the near term as well, with this energy source growing the fastest in the nation. To this end, the U.S. Energy Information Administration (EIA) expects solar to provide 41% more electricity in 2024 than in 2023. 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 in August 2022, has proved to be a solid growth catalyst for the U.S. solar stocks. Evidently, a total of 280 clean energy projects had been announced across 44 U.S. states in the IRA’s first year, representing $282 billion of investment, per a report by Goldman Sachs Asset Management. Looking ahead, this ruling is expected to be a major growth driver for the solar industry. 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. In particular, the residential solar space has been reflecting signs of continued struggles, thanks to higher interest rates, interconnection delays and the transition of California to net energy metering 3.0. Evidently, in the first quarter, residential installations declined 25% year over year. Looking ahead, a year-over-year contraction of 14% is anticipated in residential solar installations in 2024, with California’s net billing transition and higher interest rates acting as major headwinds, as per SEIA’s June 2024 report.
China’s dominance in solar module manufacturing has proved to be a major headwind for the 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.
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 #185, 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 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 14.6% to 76 cents since Mar 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 42.5% in the past year, while the Oils-Energy sector grew 9.4%. The Zacks S&P 500 composite has surged 23.4% 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 11.18X compared with the S&P 500’s 20.11X and the sector’s 3.22X.
Over the last five years, the industry has traded as high as 26.29X, as low as 9.47X and at the median of 11.17X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
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 Jun 4, 2024, First Solar revealed that its Series 6 Plus and Series 7 TR1 products are the world’s first photovoltaic (PV) solar modules to achieve the EPEAT Climate+ designation. This makes FSLR’s modules the first to meet the global standard of ultra-low carbon threshold of less-than-equal-to 400 kg CO2e/kWp. This certification should boost the demand for FSLR’s modules.
The Zacks Consensus Estimate for First Solar’s fiscal 2024 sales indicates an improvement of 36.5% from the prior-year reported figure. The company holds a solid long-term (three-to-five years) earnings growth rate of 56.2%. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: FSLR
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 Jun 20, 2024, Nextracker announced that it has acquired Ojjo, a U.S.-based renewable energy company specializing in foundation technology and services used in utility-scale ground-mount applications for solar power generation, for approximately $119 million. This takeover is projected to expand Nextracker’s addressable market opportunity for challenging soil conditions, utilizing Ojjo’s expertise in foundation technology.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 14.6% from the prior-year reported figure. The stock boasts 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 & Consensus: NXT
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 Jul 8, 2024, Enphase announced that it has started shipments of its IQ8-3P commercial three-phase microinverters, produced in the United States. This 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 return-on-equity is 48.2% compared with the industry’s average of 4.2%. The company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: ENPH
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3 Solar Stocks to Watch as Interest Rates Remain High
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. However, California’s net billing transition, high interest rates as well as China’s dominance in solar panel manufacturing (leading to price decline) may keep hurting their near-term prospects. Nevertheless, benefits from the Inflation Reduction Act (IRA) should continue to be a notable growth catalyst for U.S. solar stocks. One may keep First Solar (FSLR - Free Report) , Enphase Energy (ENPH - Free Report) and Nextracker (NXT - Free Report) in their portfolio.
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 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 June 2024, photovoltaic (PV) solar accounted for 75% of the new electricity-generating capacity added to the U.S. grid in the first quarter of 2024. Hence, it continues to be the dominant form of new generating capacity in the nation.
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 installation trend lately. Evidently, as reported by SEIA, the U.S. solar industry installed an impressive 11.8 gigawatts-direct current (GWdc) of new solar capacity in the first quarter of 2024, thereby bringing the total capacity to 200 GW in the nation. This installation reflects a solid 93.4% increase from that reported in the first quarter of 2023. We expect to witness similar robust solar growth in the United States in the near term as well, with this energy source growing the fastest in the nation. To this end, the U.S. Energy Information Administration (EIA) expects solar to provide 41% more electricity in 2024 than in 2023. 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 in August 2022, has proved to be a solid growth catalyst for the U.S. solar stocks. Evidently, a total of 280 clean energy projects had been announced across 44 U.S. states in the IRA’s first year, representing $282 billion of investment, per a report by Goldman Sachs Asset Management. Looking ahead, this ruling is expected to be a major growth driver for the solar industry. 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. In particular, the residential solar space has been reflecting signs of continued struggles, thanks to higher interest rates, interconnection delays and the transition of California to net energy metering 3.0. Evidently, in the first quarter, residential installations declined 25% year over year. Looking ahead, a year-over-year contraction of 14% is anticipated in residential solar installations in 2024, with California’s net billing transition and higher interest rates acting as major headwinds, as per SEIA’s June 2024 report.
China’s dominance in solar module manufacturing has proved to be a major headwind for the 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.
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 #185, 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 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 14.6% to 76 cents since Mar 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 42.5% in the past year, while the Oils-Energy sector grew 9.4%. The Zacks S&P 500 composite has surged 23.4% 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 11.18X compared with the S&P 500’s 20.11X and the sector’s 3.22X.
Over the last five years, the industry has traded as high as 26.29X, as low as 9.47X and at the median of 11.17X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
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 Jun 4, 2024, First Solar revealed that its Series 6 Plus and Series 7 TR1 products are the world’s first photovoltaic (PV) solar modules to achieve the EPEAT Climate+ designation. This makes FSLR’s modules the first to meet the global standard of ultra-low carbon threshold of less-than-equal-to 400 kg CO2e/kWp. This certification should boost the demand for FSLR’s modules.
The Zacks Consensus Estimate for First Solar’s fiscal 2024 sales indicates an improvement of 36.5% from the prior-year reported figure. The company holds a solid long-term (three-to-five years) earnings growth rate of 56.2%. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: FSLR
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 Jun 20, 2024, Nextracker announced that it has acquired Ojjo, a U.S.-based renewable energy company specializing in foundation technology and services used in utility-scale ground-mount applications for solar power generation, for approximately $119 million. This takeover is projected to expand Nextracker’s addressable market opportunity for challenging soil conditions, utilizing Ojjo’s expertise in foundation technology.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 14.6% from the prior-year reported figure. The stock boasts 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 & Consensus: NXT
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 Jul 8, 2024, Enphase announced that it has started shipments of its IQ8-3P commercial three-phase microinverters, produced in the United States. This 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 return-on-equity is 48.2% compared with the industry’s average of 4.2%. The company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: ENPH