SolarEdge, Enphase & First Solar: Solar Stocks Have Rallied Big, What Are The Risks?

Solar stocks have done exceedingly well this year. Our indicative theme of Solar Stocks is up by 244% year-to-date, compared to the broader S&P 500 which is up by about 11% over the same period. There’s a good reason for this. President-elect Joe Biden has pledged to spend about $2 trillion on combating climate change, with a goal of making electricity generation carbon neutral by the year 2035. The adoption of solar is likely to be key to meeting these goals. Ultra-low interest rates also mean that it’s quite cheap to fund solar projects. However, are investors discounting the risks? The stocks in our theme now trade at very high valuation multiples. First Solar (NASDAQ: FSLR) trades at about 61x adjusted 2019 earnings, SolarEdge (NASDAQ:SEDG) trades at about 60x, while Enphase Energy (NASDAQ:ENPH) trades at over 140x and demand will need to jump significantly to justify these valuations. Secondly, while costs have declined significantly, the industry is still somewhat dependent on favorable legislation to drive demand. It might not be smooth sailing on this front just yet – while Democrats have won the White House, their majority in the House of Representatives has declined, and the Senate won’t be decided until run-off elections in January.

[Updated 9/3/2020] Enphase, SolarEdge, First Solar: Solar Stocks Poised To Shine

Solar stocks are back in favor with investors, with our indicative theme of U.S. listed solar stocks – which includes First Solar (NASDAQ: FSLR), Enphase Energy (NASDAQ:ENPH) and NextEra (NYSE:NEE) among others up by about 71% YTD versus about 6% for the broader S&P 500. The theme has also outperformed, returning over 653% since the end of 2017, compared to about 30% in the S&P. While Enphase was the biggest driver of year-to-date returns, rising 159%, NextEra Energy (NEE) saw the lowest gains, rising by about 17%.

See our theme of U.S. listed Solar Stocks for data on historical performance and returns of the largest and most relevant names in the U.S. solar industry.

There are multiple trends driving investor interest in solar stocks. Firstly, solar is becoming increasingly viable, with the cost of power comparing favorably with natural gas and other renewable sources. Demand in the U.S. has also been strong, driven by the residential and commercial space as well as strong regulatory support, particularly from State governments. In fact, solar became the largest source of new electricity generation capacity last year accounting for about 40% of total capacity additions. ^[1] Historically low interest rates could also help the industry, reducing project financing costs, leading to further demand for solar. Moreover, the broader renewable energy space could outperform if Democratic Presidential candidate Joe Biden – who is ahead in the polls – is elected this November. Mr. Biden has pledged to spend almost $2 trillion on combating climate change, with a goal of making electricity generation carbon neutral by the year 2035.

First Solar manufactures solar panels that are used primarily in utility-scale solar farms. Although the company’s revenues have remained almost flat over the last two years due to lower module prices, its strong balance sheet and its differentiated thin-film panel technology could help it grow as the market continues to expand. The stock is up by about 30% year-to-date.

Enphase Energy – primarily produces components such as power inverters and control systems for solar installations. These inverters convert the direct current produced by solar panels into the alternating current used by the grid and typically control the solar power system. The stock has significantly outperformed, rising 159% year-to-date.

ENPH

NextEra Energy – the largest U.S. utility by market cap, is also the single largest owner of solar generation capacity outside China. The company is also betting big on battery storage, with plans to build nearly 700 megawatts of storage projects in California before the end of 2022. The stock is up about 17% this year.

SolarEdge Technologies provides power optimizers, solar inverters, and monitoring systems for solar power systems. While the solar panel business is relatively commoditized, the components that SolarEdge provides are more specialized and help to control and gather information from solar power systems. The stock is up by 106% year-to-date.

Solar stocks have fared well this year, but what if you are looking for a more balanced portfolio? Here’s a top-quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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1. Solar Energy Industries Association [↩]