Beginning next week, solar businesses will begin reporting first-quarter results, and Wall Street experts believe that the recent decline in the industry provides investors with an opportunity to buy shares at a discount.
An array of catalysts are cited, including worries about the industry’s cost of financing, a broader market rotation toward value, and concerns about valuations that have risen to an uncomfortable level.
However, if valuations appeared stretched previously, the recent weakness may have been too much, too soon. With positive catalysts on the horizon, these stocks appear to be on the rise.
JPMorgan said in a note, “Multiples no longer appear elevated; recommend adding to positions.” “We believe industry demand trends continue to be favorable,” the company added.
Proposal for infrastructure as a catalyst
President Joe Biden’s recently unveiled infrastructure proposal is a major driver of renewable energy and clean technology.
More than $600 billion is set aside in the plan for climate-related spending, including $100 billion for the power grid and $174 billion for electric vehicles. The Investment Tax Credit, which has been critical to the growth of the solar industry, would also be extended. The bill has been met with opposition.
The final form of the spending package is unknown, but the funding targets demonstrate the Biden administration’s commitment to environmental action.
In the short term, investors are focused on first-quarter earnings, which are typically the industry’s weakest period.
Morgan Stanley stated that the quarterly updates are “particularly important” this time around due to the group’s recent weakness, as well as any insight management teams will provide into how the sector is positioned going forward.
Priorities ahead of earnings
Ahead of earnings, the company is keeping an eye on four key factors: energy storage demand, raw material costs and availability, upcoming policy changes, and the dynamics surrounding new customers.
Solar is coming off a record year, and Morgan Stanley believes the latest company results will indicate continued growth. Renewables are expected to account for roughly 40% of total power output by 2030, up from around 11% today. Morgan Stanley predicts that by 2035, that figure will have risen to 55%.
Because of this bullish outlook, the firm has assigned overweight ratings to companies such as wind-blade provider TPI Composites and residential solar company Sunrun.
On the former, Morgan Stanley stated that the sector has a high barrier to entry, and that TPI’s involvement with electric vehicles is fueling upside momentum. Sunrun, on the other hand, claims to be the “leader in the U.S. residential rooftop solar market with a very strong, and improving, value proposition for customers.”
Sunrun and TPI Composites will report earnings on May 5 and 6, respectively.
JPMorgan’s top picks in the space are inverter companies Enphase Energy and SolarEdge, which it rates overweight.
“We believe ENPH is among the best-positioned companies in our coverage universe for positive estimate revisions as a result of share gains in US residential, new energy storage sales, international expansion, and initial sales into the commercial market,” the firm said.
Enphase is expected to earn 49 cents per share in the first quarter, with revenue increasing 43 percent year over year to $293 million, according to JPMorgan.
Goldman Sachs is also optimistic about Enphase’s earnings prospects, forecasting $298 million in revenue for the quarter.
“We anticipate continued organic revenue growth driven by share gains in the United States, international growth, and increased demand for both microinverters and ENPH’s [residential] battery solution,” the company said. On April 27, Enphase will report earnings.
Investors should keep an eye out for comments from management about whether the company can ramp up residential battery production to meet demand, as well as the ongoing impact of component shortages, according to the firm.
Sunnova Energy is another company that Goldman is keeping an eye on ahead of earnings, with the firm expecting “solid execution” from the Texas-based company.
Sunnova, which is on Goldman’s conviction list, is expected to grow customer additions by 96 percent year over year in 2021 as the company expands operations to at least ten new states.
In a client note, the firm stated, “We see NOVA positioned to maintain its status as the fastest-growing resi solar play in the space over the next several years.”
According to analyst Brian Lee, key things for investors to look out for in the quarterly update include battery attach rates and visibility into supply chain bottlenecks.
According to FactSet, the Street consensus is for the company to report earnings per share of 45 cents on revenue of $292 million.