Increased residential installations in the third quarter of 2022 are expected to boost the U.S. solar stocks’ growth. Also, the recently passed Inflation Reduction Act has bolstered the prospects of U.S. solar stocks. However, the UFLPA and consistent supply-chain challenges hurt the near-term prospects of solar stocks to some extent. Nevertheless, considering the rapidly growing demand for renewable energy as the preferred source among electricity developers, an investor might keep some solar stocks on the watchlist. The forerunners in the U.S. solar industry are

Enphase Energy


ENPH

,

First Solar


FSLR

and

Sunrun


RUN

.

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), buoyed by robust installation trends, solar accounted for 46% of all new electricity-generating capacity added in the United States in 2021, reflecting an improvement from 43% in 2020. 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 the growing demand over the past couple of 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, residential solar achieved a historic quarter with 1.57 GWdc installed in the third quarter in the United States, reflecting a 43% year-over-year increase. We expect to witness similar robust solar growth in the United States, going forward. To this end, the SEIA expects total solar installations in 2022 to reach 18 GWdc, reflecting an improvement from its prior expectation of 15.6 GWdc. 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 this August is projected to be a solid growth catalyst for U.S. solar stocks. The latest 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 will have access to production tax credits and an investment tax credit for domestic manufacturing across the solar value chain. SEIA and Wood Mackenzie project IRA to aid the U.S. solar market to grow 40% through 2027. This, in turn, should boost the U.S. solar stocks’ growth trajectory.

Supply-Chain Challenges & UFLPA Might Hurt

: Supply-chain constraints have been hurting the solar industry, a trend expected to continue in the near term. To this end, Wood Mackenzie expects the solar industry to remain supply constrained through at least the second half of 2023. Due to near-term supply-chain constraints, SEIA expects 77% of the effect of the IRA to materialize in the utility-scale segment beginning in 2024. Consequently, the supply-chain issue is expected to remain an overhang on utility-scale solar installations. In June 2021, the Uyghur Forced Labor Prevention Act (UFLPA) went into effect and resulted in the detention of solar modules, exacerbating ongoing supply-chain challenges. To this end, SEIA projects that UFLPA could limit solar deployment through 2023 due to module availability constraints, delaying the near-term effectiveness of the IRA to 2024 and beyond. These factors make the near-term outlook for solar stocks somewhat bleak.

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 #154, which places it in the bottom 38% 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 gloomy 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.

Before we present a few alternative energy 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, Beats S&P 500

The Solar Industry has underperformed its sector but outperformed the Zacks S&P 500 composite over the past year. The stocks in this industry have collectively gained 21.8%, while the Oils-Energy Sector has rallied 30.9% in the same time frame. However, the Zacks S&P 500 composite has fallen 17.3%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA, which is commonly used for valuing solar stocks, the industry is currently trading at 51.56X compared with the S&P 500’s 11.64X and the sector’s 3.18X.

Over the last five years, the industry has traded as high as 54.76X, as low as 19.71X and at the median of 35.49X, as the charts show below.

EV-EBITDA Ratio (TTM)

3 Solar Stocks Worth Watching

Enphase

: Based in Fermont, CA, the company designs, develops, manufactures and sells home energy solutions, while microinverters remain its legacy product. In November 2022, the company announced that it is witnessing increased deployments of its Enphase Energy Systems in Florida, North California, France, Netherlands, Belgium, Oregon and North Carolina. This reflects an increasing demand for ENPH’s products across the globe.

The Zacks Consensus Estimate for Enphase’s 2022 sales indicates an improvement of 66.8% from the prior-year reported figure. ENPH boasts a four-quarter earnings surprise of 21.76%, on average. The company currently carries a Zacks Rank #2 (Buy).

You can see


the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here


.

Price & Consensus: ENPH

Sunrun

: Based in San Francisco, CA, the company provides solar service offerings through channels, including the direct-to-consumer channel, the solar partner channel and the strategic partnership channel. In November 2022, the company released its third-quarter results. In the reported quarter, Sunrun witnessed 21% year-over-year growth in its customers.

The Zacks Consensus Estimate for Sunrun’s 2022 sales indicates an improvement of 41.5% from the prior-year reported figure. Its 2022 sales estimates imply an improvement of 2,317.50% from the 2021 reported figure. The company currently carries a Zacks Rank #2.

Price & Consensus: RUN

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. The company recently revealed that it signed a supply agreement with National Grid Renewables to deliver 1.6 GWdc Series 7 modules. The latest investment is expected to bring First Solar’s total investment in American manufacturing to more than $4 billion, while its annual US manufacturing capacity is forecast to expand to above 10 GWdc by 2025.

The Zacks Consensus Estimate for First Solar’s fourth-quarter 2022 sales indicates an improvement of 9.8% from the prior-year reported figure. The company boasts a long-term earnings growth rate of 52.5%. The company currently carries a Zacks Rank #3 (Hold).

Price & Consensus: FSLR

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