/Solar%20Panels%20on%20Roof.jpg)
With the onset of climate change and global warming, governments all over the world are now increasingly looking to lower their dependence on fossil fuel-based energy sources, such as oil and gas. As a result, renewable energy sources such as solar, wind, hydro and nuclear power have been gaining traction gradually over recent years.
Among these clean energy sources, the prevalence of solar has been particularly noteworthy.
This can be gauged from the fact that the MAC Global Solar Energy Index ($SUNI), an index which tracks the performance of publicly traded companies in the solar energy sector in the US, has rallied 234.43% over the past five years.
In the United States, the growth of solar as an energy source has been impressive in the past decade. According to a report by market research firm Statista, from a net solar power generation of below 2 terawatt hours in 2011, it reached levels of 145.6 terawatt hours in 2022. Moreover, it is projected that the net summer capacity from solar photovoltaics in the US is expected to grow to 395 GW by 2050 from 61.4 GW in 2021.
With this in mind, here are three top solar stocks for investors to consider adding to their portfolios.
Enphase Energy (ENPH)
Founded in 2006, California-based Enphase Energy is primarily engaged in the development and manufacturing of solar micro-inverters, energy storage solutions and EV charging stations with a focus on residential customers. The company commands a market cap of $24.32 billion.
Enphase Energy stock has dropped close to 30% in 2023 so far. However, its results for the first quarter were stellar and this is a good “buy the dip” candidate.
While revenues witnessed a yearly jump of 64.5% to $726 million for Q1 2023, EPS almost doubled $1.37. Moreover, both metrics surpassed the expectations of the Street.
Notably, the company showcased robust cash-generating ability from its operations in the Jan - Mar ‘23 period. In Q1 2023, Enphase Energy’s net cash from operating activities came in at $246.2 million, up 140.4% from the prior year. Long-term debt levels also remained unchanged from the previous year's figure of $1.2 billion. These developments highlight the company's operational strength and its effective debt management capabilities too.
The company also recently announced the commencement of operations at its Flex factory in Romania. Apart from ensuring the timely delivery of its microinverters in Europe, the facility has increased the company's global capacity to roughly six million microinverters per quarter. Further, Enphase Energy is also adding to its capacity in the US and is aiming to bring its total global quarterly capacity to more than 10.0 million microinverters by the end of 2023.
Valuation appears to be somewhat steep for Enphase Energy though. It is currently trading at a PE ratio of 52.2 and a PB ratio of 36.34. The Price to Cash Flow ratio is significantly lesser than the other two ratios at 24.50.
However, analysts are bullish on the stock with an overall rating of a “Strong Buy” and a mean target price of $251.69, indicating an upside potential of about 42% from current levels. Out of 27 analysts covering the Enphase Energy stock, 19 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 6 have a “Hold” rating and 1 has a “Moderate Sell” rating.
First Solar (FSLR)
Arizona-based First Solar, which went public in 1999, is the oldest listed solar power company in the US. The company, which commands a market cap of $21.14 billion, manufactures solar panels and is a provider of utility-scale photovoltaic power plants.
Notably, the First Solar stock is up 35.61% in 2023 so far, almost mimicking the 35.66% rise of the Nasdaq in the same time period. However, it's important to note that First Solar's Q1 2023 results were disappointing.
Both revenue and earnings missed analyst expectations by a wide margin. Although net sales increased by 49.4% yearly to $548.3 million, it witnessed a significant sequential decline of 45.2%. Moreover, revenues missed the consensus estimate of $724 million. The picture for EPS was better as it stood at $0.40 ($0.99 estimate) for the Jan - Mar '23 period, which compares favourably to a loss per share of $0.41 reported in the previous year.
Meanwhile, the company witnessed a cash outflow from operating activities of $34.6 million while its long-term debt almost doubled from the beginning of the year to $320.4 million. Both these developments are genuine red flags for the company as they highlight operational worries for the company.
Strategically, the company's various facilities in India and Alabama are on schedule and are expected to be completed in the second half of 2023 and 2024/205, respectively. Meanwhile, the expansion of its Ohio facility is expected to conclude in 2024.
Valuation-wise, First Solar could be viewed as expensive. It is currently trading at a PE of 512.2 and has a PB ratio of 3.64.
However, analysts remain cautiously optimistic, earmarking an overall rating of “Moderate Buy” for the stock with a mean target price of $220.15, indicating an upside potential of about 11% from current levels. Out of 22 analysts covering the First Solar stock 11 have a “Strong Buy” rating, 10 have a “Hold” rating and 1 has a “Strong Sell” rating.
SolarEdge Technologies (SEDG)
Israeli smart energy solutions provider SolarEdge Technologies develops and manufactures power optimizers, inverters, and software for residential and commercial solar installations. Founded in 2006, it commands a market cap of $14.87 billion.
Meanwhile, the SolarEdge Technologies stock has had a muted 2023 so far, correcting 7.5%. However, its latest results were impressive with both revenue and earnings surpassing estimates.
In the Jan - Mar '23 period, SolarEdge reported record revenues of $943.9 million, up 44% from the previous year. This was marked by a rise in shipments of both its key products of power optimizers (6,441 thousand, up 12.5% YoY) and inverters (329,700, up 56.2% YoY). EPS also made an almost fourfold jump from the prior year to $2.35 in Q1 2023.
Moreover, in Q1 2023, the company reported cash flow from operations of $7.9 million. This represents a marked improvement from a cash outflow of $163 million in the previous year. Also, the company's total debt remained almost stable from the previous year at $633.6 million. However, an almost doubling of inventory levels from the previous year to $874.2 million, even after a record quarter in terms of shipment and revenues can build up to be a cause of concern for the company as it may hint at poor inventory management for the company.
With a presence in 125 countries and more than 3 million residential sites, SolarEdge Technologies has a robust presence in the residential space. Moreover, the company is also developing solutions for commercial space which will cater to industrial rooftops, public buildings, carports and agriculture.
In terms of valuation metrics, SolarEdge Technologies appear to be more or less adequately priced. With a PE of 77.6 and a PB of 6.70, both these key valuation metrics are relatively soft when compared to their peers. However, its Price to Cash Flow ratio of 486.7 is high.
While this is happening, analysts remain bullish about the prospects of SolarEdge Technologies stock, apprising it a rating of “Strong Buy” with a mean target price of $372.84, indicating an upside potential of about 41.3% from current levels. Out of 19 analysts covering the Solaredge Technologies stock 14 have a “Strong Buy” rating, 1 have a “Moderate Buy” rating and 4 have a “Hold” rating.
Final Takeaway
Solar energy remains one of the foremost sources of renewable energy globally and its demand is only expected to rise. With demand visibility and increasing adoption, stocks in this sector are expected to witness considerable tailwinds in the upcoming years.
All 3 of the stocks discussed above are prudent additions to investors' portfolios. However, taking into account the fundamentals and future growth prospects, Enphase Energy is my favorite at its current price. Its robust fundamentals in the form of rising revenues and profitability, coupled with efficient debt management capabilities, stable relative valuations and its plans to increase its production capacity by the end of this year, gives the company a strong footing.
Keep an eye out this week and next, as all 3 stocks will report earnings: ENPH and FSLR are scheduled for July 27th, and SEDG is scheduled for August 1st.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
