Why Are Solar Stocks Rallying
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Clean energy equities have been on a rise with some shares up nearly 100% in just a few weeks. The surge in solar stocks was fueled by the introduction of the Inflation Reduction Act (IRA) last month.
The newly-introduced bill is likely to fuel the demand for solar panels with some companies in this sector being the clear beneficiaries. The IRA offers U.S. manufacturers credits to produce solar panels and wind turbine parts of up to $7,500, while also offering credits for the purchase of electric vehicles (EVs) manufactured in the home market.
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“There are many facets of this bill but, EVs and clean energy we think are going to be the two main winners based on where the dollars are being allocated,” said Jay Jacobs, Head of Thematic and Active Equity ETFs at Blackrock.
“I think it’s really going to be felt across the entire value chain. It's not going to be one winner. We think that there's going to be many winners in this space,” he added.
Companies that received a significant boost from the bill include solar providers Sunrun and First Stolar. Other companies that benefited from IRA include fuel cell developers like Ballard Power Systems and Plug Power.
Plug Power’s Chief Executive Officer Andy Marsh expects the boost to push the company’s road to profitability by six months “into early 2024.”
The IRA significantly “changed the landscape for both our company and others,” Marsh added.
Shares of Plug Power are up over 80% in the past month.
Analysts Increasingly More Bullish on Solar stocks
Wall Street analysts have been raising their ratings on clean energy stocks over the past few weeks. Wall Street giant JPMorgan recently upgraded First Solar (NASDAQ:FSLR) and TPI Composites (NASDAQ:TPIC), both of which are set to receive production tax credits at their U.S. factories. JPMorgan upgraded both stocks to Overweight.
However, Bloomberg Intelligence’s Rob Barnett warned that the IRA will not make an instant impact but will rather “unfold over the course of 5 to ten years.”
Barnett also warned investors that even though some of the clean energy stocks saw unprecedented price jumps in the last month, their traditional valuation metrics look quite stretched.
"I think from a demand perspective the fundamentals look good. But if you’re looking at traditional valuation metrics, they’re very stretched for a lot of these companies."
He also questioned whether investors should be comfortable with the high valuation of these companies if they are going through a period of rapid growth. The rising cost of production of solar equipment generally makes solar stocks a higher risk, higher yield trade. But Goldman Sachs isn’t deterred.
In fact, goldman Sachs analysts described the IRA bill as a big boost for the entire solar sector, which explains the significant leg higher in solar companies’ shares.
The bank’s research department believes that solar stocks with U.S. leverage and production facilities based in the U.S. are sitting in the best position going forward, with roughly 40% return potential among some of the stocks preferred by the banking giant.
Goldman Sachs analysts double-upgraded First Solar and Maxeon Solar Technologies Ltd (NASDAQ:MAXN) from Sell to Buy while downgrading the likes of Shoals and Canadian Sollar citing smaller exposure to upside benefits from the bill. Analysts said that solar stocks could stage another 50% rally despite strong gains made in recent weeks.
Solar companies like Sunrun Inc (NASDAQ:RUN) and Array Technologies Inc (NASDAQ:ARRY) are also seen as businesses carrying the highest upside potential as these are likely to benefit immediately from the IRA.
On the other hand, Goldman sees MAXN as well-positioned to cash in on solar cell and panel credits if the company manages to add 3GW more capacity in the U.S. in 2025. Other potential beneficiaries include Enphase and SolarEdge, which are likely to leverage inverter manufacturing credits.
With the IRA as a major boost for the entire sector, the solar market is expected to grow at a compound annual growth rate (CAGR) of over 20% in the next five years, according to multiple market research firms. One of those firms, Fortune Business Insights, projects the global solar market to hit $1 trillion at the end of 2028.
Summary
Solar stocks are witnessing rapid ascendance in recent weeks on the back of the IRA passage. Analysts are adjusting their ratings to reflect stronger demand for solar panels as investors look to take advantage of a significant positive catalyst that could see some shares double their valuations in just a few months.
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