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3 Solar Stocks to Watch Amid Declining Solar Module Pricing
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Increased solar installation activities across the United States in recent times should bode well for U.S. solar stocks. The Inflation Reduction Act (IRA) benefits have been proven to be a solid growth catalyst for U.S. solar stocks and are expected to continue to boost the industry in the near term. However, declining module pricing and an expected decline in residential installation might continue to hurt their near-term prospects to some extent. Nevertheless, considering the impressive projections for solar capacity additions in the United States for 2024, investors might keep First Solar (FSLR - Free Report) , Nextracker (NXT - Free Report) and SunPower (SPWR - Free Report) in 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 2023, buoyed by robust installation trends, solar accounted for 50% of all new electricity-generating capacity added in the United States in 2022, reflecting an improvement from 46% in 2021. This represents solar’s largest-ever share of generating capacity. It ranked first among all technologies for the second year in a row.
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, overcoming the initial adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend prevalent in the nation. For instance, as reported by SEIA, the U.S. solar industry installed 6.5 gigawatts-direct current (GWdc) of capacity in the third quarter of 2023, indicating a 35% increase from that reported in the third quarter of 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 gigawatts (GW) of new solar capacity projected to come online. 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 last August 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 if all of the capacity addition plans materialize, the United States (including Puerto Rico) will increase its total module manufacturing capacity by a significant order of magnitude by 2026 (from 10.6 GW to 108.5 GW). 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. To this end, the SEIA projects changes to net energy metering policy in California and elevated interest rates across the U.S. to lead to a brief decline in residential solar installation in 2024, before growth resumes in 2025. Moreover, imbalances in global solar module supply and demand, primarily driven by excess manufacturing capacity in China, have put significant downward pressure on module pricing, with average global pricing falling 30-40% from the first-quarter 2023 level to the third quarter. Although the United States imported less than 0.1% of modules from China in 2023, the ripple effects caused by this imbalance have pushed U.S. module prices down 10-15% over the same timeframe. This may continue to impact solar stocks’ profitability in the near term. Other factors like elevated financing costs, transformer shortages, and interconnection bottlenecks might continue to have some adverse impact on the utility-scale segment 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 #180, which places it in the bottom 28% 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 30.2% to $2.43 since Oct 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 fell 50.2% in the past year, and the Oils-Energy sector declined 2.2%. The Zacks S&P 500 Composite has surged 20.7% 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 10.43X compared with the S&P 500’s 14.40X and the sector’s 3.62X.
Over the last five years, the industry has traded as high as 38.66X, as low as 9.28X and at the median of 22.89X, 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 Dec 13, 2023, Nextracker announced that it has achieved a corporate milestone of 10 GW of smart solar trackers, either operational or under fulfilment for projects located in the Middle East, Africa and India. This reflects the company’s solid footprint in the solar industry.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 27.9% from the prior-year reported figure. The bottom-line estimate for fiscal 2024 indicates an improvement of 812.5% from the prior-year reported figure. The company currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: NXT
First Solar: Based in Tempe, AZ, the company is a leading global provider of comprehensive PV solar energy solutions and specializes in designing, manufacturing and selling solar electric power modules using a proprietary thin-film semiconductor technology. On Jan 19, 2024, First Solar announced that it has acquired a 1.2-million square foot facility in Troy Township, Ohio. The facility, formerly known as Peloton Output Park, is expected to be repurposed into a new distribution center serving First Solar’s Ohio manufacturing footprint, which comprises three manufacturing facilities with a combined annual nameplate capacity of approximately 6 gigawatts (GW) of capacity at the end of 2023. This should enable FSLR to maintain its position as the largest U.S. solar module manufacturer.
The Zacks Consensus Estimate for the company’s 2024 sales indicates an improvement of 31.7% from the prior-year estimated figure. The bottom-line estimate for 2024 implies growth of 71.3% from the 2023 estimated figure. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: FSLR
SunPower: Based in San Jose, CA, the company designs, develops, manufactures, markets and sells high-performance solar electric power technology products, systems and services worldwide for residential, commercial and utility-scale power plant customers. On Nov 14, 2023, SunPower revealed its plans to install more than 1 megawatt of solar at Poppy Grove in Elk Grove, CA, making it one of the largest affordable housing communities in the nation to run on renewable energy. The 2,649-panel system is designed to offset up to 80% of the residents' consumption, helping them save up to $1,000 annually on their utility bills. This should further strengthen SPWR’s position in the solar industry.
The Zacks Consensus Estimate for the company’s 2024 earnings implies an improvement of 39.1% from the prior-year estimated figure. It boasts a long-term earnings growth rate of 75%. The company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: SPWR
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3 Solar Stocks to Watch Amid Declining Solar Module Pricing
Increased solar installation activities across the United States in recent times should bode well for U.S. solar stocks. The Inflation Reduction Act (IRA) benefits have been proven to be a solid growth catalyst for U.S. solar stocks and are expected to continue to boost the industry in the near term. However, declining module pricing and an expected decline in residential installation might continue to hurt their near-term prospects to some extent. Nevertheless, considering the impressive projections for solar capacity additions in the United States for 2024, investors might keep First Solar (FSLR - Free Report) , Nextracker (NXT - Free Report) and SunPower (SPWR - Free Report) in 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 2023, buoyed by robust installation trends, solar accounted for 50% of all new electricity-generating capacity added in the United States in 2022, reflecting an improvement from 46% in 2021. This represents solar’s largest-ever share of generating capacity. It ranked first among all technologies for the second year in a row.
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, overcoming the initial adverse impacts of the COVID-19 pandemic. This is evident from the latest installation trend prevalent in the nation. For instance, as reported by SEIA, the U.S. solar industry installed 6.5 gigawatts-direct current (GWdc) of capacity in the third quarter of 2023, indicating a 35% increase from that reported in the third quarter of 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 gigawatts (GW) of new solar capacity projected to come online. 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 last August 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 if all of the capacity addition plans materialize, the United States (including Puerto Rico) will increase its total module manufacturing capacity by a significant order of magnitude by 2026 (from 10.6 GW to 108.5 GW). 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. To this end, the SEIA projects changes to net energy metering policy in California and elevated interest rates across the U.S. to lead to a brief decline in residential solar installation in 2024, before growth resumes in 2025. Moreover, imbalances in global solar module supply and demand, primarily driven by excess manufacturing capacity in China, have put significant downward pressure on module pricing, with average global pricing falling 30-40% from the first-quarter 2023 level to the third quarter. Although the United States imported less than 0.1% of modules from China in 2023, the ripple effects caused by this imbalance have pushed U.S. module prices down 10-15% over the same timeframe. This may continue to impact solar stocks’ profitability in the near term. Other factors like elevated financing costs, transformer shortages, and interconnection bottlenecks might continue to have some adverse impact on the utility-scale segment 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 #180, which places it in the bottom 28% 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 30.2% to $2.43 since Oct 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 fell 50.2% in the past year, and the Oils-Energy sector declined 2.2%. The Zacks S&P 500 Composite has surged 20.7% in the same time frame.
One-Year Price Performance
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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 10.43X compared with the S&P 500’s 14.40X and the sector’s 3.62X.
Over the last five years, the industry has traded as high as 38.66X, as low as 9.28X and at the median of 22.89X, 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 Dec 13, 2023, Nextracker announced that it has achieved a corporate milestone of 10 GW of smart solar trackers, either operational or under fulfilment for projects located in the Middle East, Africa and India. This reflects the company’s solid footprint in the solar industry.
The Zacks Consensus Estimate for Nextracker’s fiscal 2024 sales indicates an improvement of 27.9% from the prior-year reported figure. The bottom-line estimate for fiscal 2024 indicates an improvement of 812.5% from the prior-year reported figure. The company currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: NXT
First Solar: Based in Tempe, AZ, the company is a leading global provider of comprehensive PV solar energy solutions and specializes in designing, manufacturing and selling solar electric power modules using a proprietary thin-film semiconductor technology. On Jan 19, 2024, First Solar announced that it has acquired a 1.2-million square foot facility in Troy Township, Ohio. The facility, formerly known as Peloton Output Park, is expected to be repurposed into a new distribution center serving First Solar’s Ohio manufacturing footprint, which comprises three manufacturing facilities with a combined annual nameplate capacity of approximately 6 gigawatts (GW) of capacity at the end of 2023. This should enable FSLR to maintain its position as the largest U.S. solar module manufacturer.
The Zacks Consensus Estimate for the company’s 2024 sales indicates an improvement of 31.7% from the prior-year estimated figure. The bottom-line estimate for 2024 implies growth of 71.3% from the 2023 estimated figure. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: FSLR
SunPower: Based in San Jose, CA, the company designs, develops, manufactures, markets and sells high-performance solar electric power technology products, systems and services worldwide for residential, commercial and utility-scale power plant customers. On Nov 14, 2023, SunPower revealed its plans to install more than 1 megawatt of solar at Poppy Grove in Elk Grove, CA, making it one of the largest affordable housing communities in the nation to run on renewable energy. The 2,649-panel system is designed to offset up to 80% of the residents' consumption, helping them save up to $1,000 annually on their utility bills. This should further strengthen SPWR’s position in the solar industry.
The Zacks Consensus Estimate for the company’s 2024 earnings implies an improvement of 39.1% from the prior-year estimated figure. It boasts a long-term earnings growth rate of 75%. The company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: SPWR