Solar stocks are set to rise in the coming quarters and years. The solar energy market was valued at $52.5 billion in 2018, and is predicted to more than quadruple to $223.3 billion by 2026. That increase represents a 20.5% CAGR in that same period. Those numbers alone make it easy to see why investors are keen to find the right stocks in the sector to invest in.
Solar power capacity is still far from sufficient to supply any nation’s electrical power needs, but growth has been exponential. Total photovoltaic electricity supplied 3% of the world’s usage in 2019. On a per-country basis, the United States, China and Germany used solar energy for 2.8%, 3.9% and 8.6% of their respective countrywide electricity requirements in 2019.
The growth rate above indicates that those numbers, while relatively small, will continue to grow. This is the beginning of a new era of energy production. Solar stocks will make investors large returns over that period. But just as with any industry, there will be winners and losers. And although the technology from these companies is new, the methods of evaluating their stocks remain the same. So while this nascent space heats up, here are seven names to consider investing in.
- Enphase Energy (NASDAQ:ENPH)
- Sunrun (NASDAQ:RUN)
- SMA Solar Technology (OTCMKTS:SMTGF)
- Sunnova Energy International (NYSE:NOVA)
- Canadian Solar (NASDAQ:CSIQ)
- First Solar (NASDAQ:FSLR)
- Beam Global (NASDAQ:BEEM)
Solar Stocks: Enphase Energy (ENPH)
Enphase Energy provides all-in-one residential solar systems. The company is the world leader in the supply of solar microinverters. ENPH stock itself has seen tremendous growth in the past few years, rising from near $5 to a current price above $70. In fact, 10-year growth is above 900%.
That growth is due to a burgeoning market, but also should serve as testament to the management team. The company earns excess returns based on its usage of capital. Its return on invested capital is 94%, while its weighted average cost of capital is 6.9%. Any company that sees high returns on capital invested should see growth, as long as other areas are well managed.
Although many aspects of the company are very good, including capital use, there are considerations to heed prior to investing. The solar industry is currently receiving more investor attention than in the past. This is seemingly a good thing. But as part of the overall trend toward greener energy and environmentalism, solar stocks are being bid up. Thus, metrics such as price-earnings ratios are likely to be less appealing. In short, there is some overvaluation of solar equities. So, the point is that Enphase or other solar stocks may well experience some pullbacks.
Recent financial performance from the company has been a mixed bag as well. Its year-over-year Q2 revenues were down 6.94%. But the company also posted a record gross margin of 39.6% on a non-GAAP basis. Analysts generally consider it a buy rather than a hold in a 10-to-6 ratio.
Sunrun, like Enphase, provides residential solar energy systems. This includes design, installation, sale, maintenance and finance thereof through a direct-to-consumer channel. Earlier this year, it announced it was acquiring Vivint (NYSE:VSLR). The deal will be consummated in October as shareholders from both sides will vote to approve the deal. Perhaps as importantly, the U.S. Securities and Exchange Commission has notified Sunrun that the deal is good from an anti-trust perspective.
Sunrun shareholders will be the dominant party in the deal, retaining roughly 64% ownership of the diluted shares of the combined company. Current Vivint shareholders will exchange VSLR shares for RUN stock at a ratio of 1 for 0.55.
Sunrun’s CEO Lynn Jurich said this about the acquisition:
“Americans want clean and resilient energy. Vivint Solar adds an important and high-quality sales channel that enables our combined company to reach more households and raise awareness about the benefits of home solar and batteries. This transaction will increase our scale and grow our energy services network to help replace centralized, polluting power plants and accelerate the transition to a 100% clean energy future. We admire Vivint Solar and its employees, and look forward to working together as we integrate the two companies.”
That increased scale in this early phase of solar energy should prove valuable. The companies that have established themselves in solar will now look to get bigger. Organic growth is slowing in the sector, so the ability to expand by acquisitions gives Sunrun a scaling advantage.
Solar Stocks: SMA Solar Technology (SMTGF)
SMA Solar Technology is a German company which produces both residential and commercial solar systems. Primarily it makes solar inverters and monitoring systems for solar power. SMTGF stock trades foremost on the Frankfurt Stock Exchange but also in the U.S. over-the-counter market. The company divides its operations into three major segments: Home, Business and Large Scale & Project Solutions.
The company’s most important market is Germany. However, the company is operating abroad and undergoing international expansion. It is expanding operations in the U.S. The company is quite even in terms of sales across its three business segments listed above. In Q2 it totaled 194 million euros in sales. The breakdown was 56.8 million euros, 70.1 million euros and 68 million euros in sales in each of those segments respectively. Investors who look for diversity of product revenue will be pleased to know that SMTGF exemplifies it.
The company has also experienced growth in Europe as well as the Americas led by the U.S. market. In the first half of 2020, sales increased 19.2% in Europe year-over-year. Sales in the Americas during the same period nearly tripled, rising from 59.3 million euros to 177.8 million euros. So, very clearly, the company has a strategy to establish itself in the U.S. as solar begins to take hold.
Sunnova Energy International (NOVA)
Sunnova is a Houston-based company that analysts are in favor of. Current coverage indicates that eight analysts consider it a buy with none rating it a hold or lower. The company is a storage service provider.
Sunnova is at a turning point in terms of operations. The company’s strategy has been expansion in terms of customer acquisitions in order to build scale. The company’s secondary concern has been operational soundness. So, build the customer base and then clean up the operations. This is not a groundbreaking strategy, but a sound one which companies commonly pursue.
Investors will be interested to know that the company had 53,600 customers by mid-2018, which increased to 67,600 a year later. Sunnova reported 91,600 customers at the end of Q2 2020. That growth represents a 70.9% increase in customer base in two years.
So, while Sunnova’s operating cash flows are still negative, the increasing customer base provides strong tailwinds. Further, potential investors should also look at how the company has been quickly improving cash flows. The trend there is very positive. In 2018, operating cash flows were -$13.2 million through the first fiscal half of the year. In 2019, -$10.5 million. And in 2020, -$1.3 million in operating cash flows. So, should the trend continue, all of those expensive customer acquisitions will start to become truly valuable. This company looks to be sitting at a turning point.
Solar Stocks: Canadian Solar (CSIQ)
Canadian Solar is a company which has rocketed out of the pandemic trough. Shares were as low as $12 and currently sell at $35. Investors who had the luck and foresight to pick up shares then would be looking at a 143% capital appreciation.
Year to date, CSIQ stock has appreciated by 62%. The company’s upward trajectory doesn’t look to simply be a case of having caught a lucky bounce.
Analysts are somewhat middle of the road when it comes to Canadian Solar. Of the six analysts covering it currently, three favor it as a buy and three favor it as a hold. If you’ve read my articles you probably know I love the metric of ROIC vs. WACC. Canadian Solar’s return on invested capital outweighs the cost thereof 8.15% to 6.53%. This isn’t stellar by most measures, but in a sector where capital returns often run negative, this is a positive.
CSIQ shares also have merit from a value perspective relative to industry peers. CISQ’s P/E ratio is a low 7.55x. This is better than most of its industry peers, meaning investors will pay relatively very little for a piece of CSIQ’s earnings. From that perspective it does look like a clear winner. However, this is possibly a result of the company being older than its contemporaries. It was established in 2001 and thus its earnings are likely to be more stable than younger companies. Nevertheless, it is a solid company to consider as a solar energy play.
First Solar (FSLR)
First Solar is one of the more secure players in the solar industry. As the company puts it “Our bankable energy solutions provide access to capital and low-cost financing from leading utilities and energy investors.” This is indeed backed up by an astoundingly high ROIC of 186.15% balanced by a WACC of 9.91%. The company is very bankable and has little problem securing financing for projects.
This stability is a double-edged sword of sorts. Yes, banks will easily extend credit to this well-established company. Yet, investors are likely to look at it as more the dependable stalwart of the industry. Because it doesn’t have incredible growth ahead of it, investors are going to perceive it as a play on security. And that’s what it is. Value investors will appreciate it for that, and it could also be used to diversify risks for investors who have several solar equities in their respective portfolios.
To me, this is probably why analysts consider it a buy, but there is hardly consensus. Nevertheless, in the event that the warming solar market suffers a correction, First Solar is where money will want to be.
Solar Stocks: Beam Global (BEEM)
Beam Global is a very small, up-and-coming stock and firm. The San Diego company has only 35 employees. The company’s products include solar-powered EV charging stations. Undoubtedly, this is a speculative play for solar investors. Shares trade around $10 and analyst coverage is positive with three buys among the three analysts who cover the equity. Their stock price target is $24, leaving a ton of upside at current prices.
The company claims that its EV ARC 2020 product is the “only 100% renewable, transportable, off-grid EV charging option on the market.” The charging station does look like something which could have a lot of demand.
Beam Global is a brand pivot from the previously named Envision Solar International. Essentially, this is a growth stock really attempting to carve a niche at the intersection of the emerging EV and solar markets. Investors looking for growth, EV and solar positions in their portfolios can tick all three boxes with BEEM stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.