The continued shift from fossil fuels to renewable energy sources and the incentives under the Inflation Reduction Act will likely drive solid growth for U.S. solar companies. While macroeconomic challenges might impact solar companies over the near term, the long-term growth potential seems attractive.
According to a recent report by the Solar Energy Industries Association (SEIA) and Wood Mackenzie, the U.S. solar market installed 6.1 gigawatts (GW) of electric capacity in the first quarter of 2023, marking a 47% year-over-year increase. The quarter’s performance was fueled by delayed solar projects coming online and easing supply chain bottlenecks. Looking ahead, Wood Mackenzie estimates the solar market to triple in size over the next five years, with a total installed solar capacity of 378 GW by 2028.
Bearing in mind a solid demand backdrop, I used TipRanks Stock Comparison Tool to compare the following solar stocks and find out Wall Street’s top pick.
Enphase Energy (ENPH)
Enphase Energy (NASDAQ:ENPH) is a global supplier of microinverter-based solar and battery systems. The company’s first-quarter adjusted earnings per share increased 73% year-over-over to $1.37, driven by more than 64% revenue growth and a higher gross margin. Enphase’s gross margin gained from the favorable impact of iQ8 microinverters on the product mix and improved logistics.
However, ENPH shares plunged significantly following the results, as the slowdown indicated by the company’s second-quarter revenue guidance spooked investors. The weak Q2 guidance reflected the impact of higher interest rates on installers and California’s new energy metering rules under NEM 3.0. The NEM 3.0 significantly reduces the solar energy credits for residential customers, thus adversely impacting solar adoption.
Nevertheless, Enphase views NEM 3.0 as a net positive for California and anticipates strong demand to resume for solar plus storage systems after three to four months. Further, the company is optimistic about its European business and plans to introduce its iQ8 microinverters and IQ batteries in many more countries in Europe throughout 2023.
Recently, Barclays analyst Christine Cho lowered the price target for Enphase Energy stock to $226 from $248 and maintained a “hold” rating. Cho believes that Enphase is set to gain market share in the European residential solar space.
With 18 buys, three holds and two sells, Wall Street has a “moderate buy” consensus rating on Enphase Energy. The average price target of $254.76 implies 52% upside.
SolarEdge Technologies (SEDG)
SolarEdge (NASDAQ:SEDG) is one of the leading providers of photovoltaic solar inverters. The company’s adjusted earnings per share jumped by an impressive 142% year-over-year to $2.90 in the first quarter, thanks to a 44% rise in revenue and improved margins. SolarEdge witnessed solid demand for its products in Europe and other international markets in the first quarter.
However, SolarEdge’s U.S. revenues declined on a quarter-over-quarter basis due to weakness in the residential segment because of macro pressures and lower battery sales. While the company expects the downturn in the U.S. residential market to continue in the short term, it is confident about its long-term prospects.
Barclays’ Christine Cho believes that SolarEdge is well-positioned to win market share in the U.S. The analyst expects the company’s commercial and industrial backlog to shield it from the slowdown in the U.S. residential market and a possible deceleration in Europe. Cho lowered the price target for SolarEdge to $390 from $392 but maintained a “buy” rating on the stock.
Most analysts covering SolarEdge are bullish on the stock. Wall Street’s “strong buy” consensus rating on SolarEdge is based on 12 buys and one hold. At $391.31, the average price target indicates nearly 54% upside potential.
First Solar (FSLR)
First Solar (NASDAQ:FSLR) is one of the leading providers of advanced thin-film photovoltaic modules. The company’s first-quarter results lagged analysts’ expectations. The decrease in the volumes of modules sold to third parties dragging down overall sales by 45.3% on a sequential basis.
Despite the weakness in Q1 top line, the company reaffirmed its full-year revenue and profitability guidance, based on solid bookings.
Last month, investors cheered First Solar’s acquisition of European thin-film specialist Evolar for an up-front payment of $38 million at closing and an additional $42 million based on certain technical milestones. Overall, First Solar’s investments in research and development and capacity expansion position it well for long-term growth. Moreover, the company is expected to benefit heavily from the Inflation Reduction Act due to its significant U.S. operations.
Recently, Argus analyst Kristina Ruggeri reiterated a “buy” rating on FSLR stock with a price target of $261. Ruggeri raised the earnings per share (EPS) estimate for fiscal 2024 to $11.97 from $11.16, with the new forecast reflecting about 65% growth over the estimated fiscal 2023 EPS. The analyst expects the federal tax credits under the Inflation Reduction Act to significantly boost the company’s margins.
Overall, Wall Street is cautiously optimistic about First Solar, with a “moderate buy” consensus rating based on eight buys, nine holds and two sells. The average price target of $222.03 implies nearly 17% upside.
To conclude, Wall Street’s average price target indicates comparable upside for Enphase and SolarEdge stocks. However, analysts seem highly bullish on SolarEdge and are cautiously optimistic about Enphase and First Solar. SolarEdge’s robust growth potential in the international solar markets and its efforts to further enhance its margins through cost efficiencies are expected to drive the stock higher.
On the date of publication, Sirisha Bhogaraju did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
