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. Increased solar installation activities across the nation in recent times should also bode well for U.S. solar stocks. However, consistent supply-chain challenges 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 2023, an investor might keep some solar stocks on the watchlist. The forerunners in the U.S. solar industry are First Solar FSLR, Nextracker NXT and JinkoSolar Holdings JKS.
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 5.6 gigawatts-direct current (GWdc) of capacity in the second quarter of 2023, indicating a 20% increase from that reported in the second quarter of 2022. We expect to witness similar robust solar growth in the United States going forward. To this end, Wood Mackenzie and SEIA jointly forecast the U.S. solar industry to add a record 32 GW of new capacity in 2023, which reflects a 52% increase from the 2022 level. 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.
Supply-Chain Challenges Might Hurt: Supply-chain constraints have been hurting the solar industry, a trend expected to continue in the near term. Annual solar additions contracted in 2022 due to intense supply-chain constraints related to the pandemic and other regulatory trade actions. Although the recent installation trend indicates that developers are recovering from supply-chain hurdles, the utility-scale solar industry still faces some constraints. Due to near-term supply-chain constraints, SEIA formerly expected 77% of the effect of the IRA to materialize in the utility-scale segment beginning 2024. Consequently, the supply-chain issue can be expected to continue to impact utility-scale solar installations to some extent, at least in the near term.
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 #202, which places it in the bottom 19% 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 17.3% to $1.29 since Aug 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 lost 60.3% in the past year, and the Oils-Energy sector declined 8.1%. The Zacks S&P 500 Composite has surged 12.2% 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 14.10X compared with the S&P 500’s 12.69X and the sector’s 3.31X.
Over the last five years, the industry has traded as high as 51.02X, as low as 14.00X and at the median of 29.79X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Solar Stocks Worth Watching
JinkoSolar Holdings: Based in Shanghai, China, the company is a manufacturer of solar products like silicon wafers, solar cells and solar modules, with a global network spanning Europe, North America and Asia. On Oct 30, 2023, JinkoSolar announced its third-quarter 2023 results. Its total solar module, cell and wafer shipments were 22,597 megawatts (MW) (21,384 MW for solar modules, and 1,213 MW for cells and wafers) in the third quarter, up 108.2% from that recorded in the last reported quarter. This reflects solid demand for JKS’ products in the solar market.
The Zacks Consensus Estimate for JinkoSolar’s 2023 sales indicates an improvement of 34.9% from the prior-year reported figure. The bottom-line estimate for the year indicates an improvement of 108.6% from the 2022 reported figure. The company currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: JKS
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 Oct 25, 2023, Nextracker reported second-quarter fiscal 2024 results. Its quarterly revenues worth $573 million improved a solid 23% year over year.
The Zacks Consensus Estimate for NXT’s fiscal 2024 sales indicates an improvement of 23% from the prior-year reported figure. The bottom-line estimate for fiscal 2024 implies growth of 812.5% from the 2022 reported 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: NXT
First Solar: Based in Tempe, AZ, the company is a leading global provider of comprehensive PV solar energy solutions. It specializes in designing, manufacturing and selling solar electric power modules using a proprietary thin-film semiconductor technology. On Nov 1, 2023, First Solar announced that it has signed an agreement to supply 500 megawatts (MW) of advanced Series 7 thin film modules to Swift Current Energy. Such an agreement reflects the solid demand that FSLR’s products enjoy in the solar market.
The Zacks Consensus Estimate for First Solar’s 2023 sales indicates an improvement of 33.3% from the prior-year reported figure. The consensus estimate for 2023 earnings has improved 1.8% over the past 90 days. The company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: FSLR
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