Soaring oil prices and the heightened sensitivity to climate change have added new urgency to accelerate the clean energy transition. One of the key constituents of the renewable energy sector, and the beneficiary of greater demand thereof, is the solar industry.
Solar adoption is having its day in the sun. Annual renewable capacity additions broke a new record in 2021, increasing 6%, and are projected to rise another 8% in 2022, according to International Energy Agency (IEA) forecasts. The agency says solar accounts for 60% of all renewable capacity additions.
Apart from this secular trend, other factors such as falling prices, wider adoption and technological innovations will continue to a create tailwind for the renewable industry. The following stocks are well-positioned to benefit from the growing footprint of solar energy and a long growth runway as the world’s transition to renewable energy continues to intensify.
SolarEdge (SEDG) is the largest global solar inverter manufacturer, based on revenue. The inverter is regarded as the brains of a solar energy system and is used to convert direct current produced by solar panels into alternating current used by households/grid and optimize energy production.
SolarEdge’s products are tied to a broad range of solar market segments -- from residential solar installations to commercial and small utility-scale solar installations.
“The company sells its products directly to solar installers, engineering, procurement, and construction firms and indirectly to solar installers through distributors and electrical equipment wholesalers,” says a Morningstar equity report.
SolarEdge initially targeted the residential market but has expanded its product offerings to the commercial market and more recently the utility-scale market. “This strategy has expanded the company's total addressable market or TAM,” says equity analyst, Brett Castelli, but cautions that average selling prices and gross margins typically deteriorate as project sizes increase.
SolarEdge has proved itself as a market share leader capable of achieving consistent profitability in the distributed solar inverter market. “Similarly, we expect the company's storage efforts to be successful given the close link between inverters and storage,” says Castelli, whose US$254 fair value estimate for the stock is underpinned by continued growth in the company’s solar business and its energy storage segment.
The company’s foray into other areas of smart energy technology, including energy storage, e-mobility, and uninterrupted power supply offer the potential to meaningfully increase its TAM.
However, Castelli takes “a wait-and-see approach with the company's entrance into” these new markets.
A legacy solar company, First Solar (FSLR) designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects.
The world’s largest thin-film solar module manufacturer has production lines in Vietnam, Malaysia, and Ohio, and plans to add a large factory in India.
The company has pivoted back to its origins as a supplier of thin-film solar modules following the exit of its North American development business and its operations and maintenance business in 2021.
The company’s development business supported profits until 2017 when the module business faced challenges, but “margins in the business became compressed in recent years, and we think the company made a prudent decision to exit the U.S. development business in 2021,” says a Morningstar equity report.
Earlier this year, the company also announced plans to exit its Japanese development operations, as it completes its transition back to a pure-play module supplier.
Further, the company has increasingly become focused on select end markets for its sales efforts. “The U.S. and India represent nearly 90% of booking opportunities, where policies leave the company in a more favourable competitive position,” says Castelli, who pegs the stock’s fair value at US$77.
In particular, the company performs well in the U.S. utility-scale market, where its market share is approximately 30%.
First Solar remains closely tied to U.S. solar trade and manufacturing policy since the U.S. is its largest market. “We also expect First Solar will be the primary beneficiary of any U.S. solar manufacturing incentives,” Castelli adds.
Global energy technology company, Enphase Energy (ENPH) delivers smart, easy-to-use solutions that manage solar generation, storage, and communication on one platform. Enphase is the world leader in microinverter technology for solar projects. The technology serves the rooftop solar market and produces a fully integrated solar-plus-storage solution.
Enphase is in the midst of a pivot from a microinverter company to selling home energy solutions. “Enphase targets to create a one-stop-shop for solar installers: microinverters, energy storage, EV charging, and digital services for installers and homeowners,” says a Morningstar equity report.
This strategy leverages its existing position with installers to expand its total addressable market, the report adds, while maintaining the company’s core end market of distributed generation.
Geographically, “Enphase has generated approximately 80% of its revenue from the United States and has only served the residential market,” says Castelli, who puts the stock’s fair value at US$132.
However, Enphase is now increasing its focus on diversifying its end markets by geography and market segment. “The company is looking to build on success domestically to expand internationally,” Castelli notes, pointing out Enphase also plans to introduce a microinverter for the small commercial segment in 2022, its first product outside the residential market.
Furthermore, trade tensions between U.S. and China have made it difficult for Chinese competitors to enter the U.S. market. This has contributed to an oligopolistic market in the U.S., says Castelli, but cautions there isn’t enough evidence this will continue to be the case over time.
