Soaring oil prices and the heightened sensitivity to climate change have added new urgency to accelerate the clean energy transition. One of the key constituents of the renewable energy sector, and the beneficiary of greater demand thereof, is the solar industry.
Solar adoption is having its day in the sun. Annual renewable capacity additions broke a new record in 2021, increasing 6%, and are projected to rise another 8% in 2022, according to International Energy Agency (IEA) forecasts. The agency says solar accounts for 60% of all renewable capacity additions.
Apart from this secular trend, other factors such as falling prices, wider adoption and technological innovations will continue to a create tailwind for the renewable industry. The following stocks are well-positioned to benefit from the growing footprint of solar energy and a long growth runway as the world’s transition to renewable energy continues to intensify.
SolarEdge (SEDG) is the largest global solar inverter manufacturer, based on revenue. The inverter is regarded as the brains of a solar energy system and is used to convert direct current produced by solar panels into alternating current used by households/grid and optimize energy production.
SolarEdge’s products are tied to a broad range of solar market segments — from residential solar installations to commercial and small utility-scale solar installations.
“The company sells its products directly to solar installers, engineering, procurement, and construction firms and indirectly to solar installers through distributors and electrical equipment wholesalers,” says a Morningstar equity report.
SolarEdge initially targeted the residential market but has expanded its product offerings to the commercial market and more recently the utility-scale market. “This strategy has expanded the company’s total addressable market or TAM,” says equity analyst, Brett Castelli, but cautions that average selling prices and gross margins typically deteriorate as project sizes increase.
SolarEdge has proved itself as a market share leader capable of achieving consistent profitability in the distributed solar inverter market. “Similarly, we expect the company’s storage efforts to be successful given the close link between inverters and storage,” says Castelli, whose US$254 fair value estimate for the stock is underpinned by continued growth in the company’s solar business and its energy storage segment.
The company’s foray into other areas of smart energy technology, including energy storage, e-mobility, and uninterrupted power supply offer the potential to meaningfully increase its TAM.
However, Castelli takes “a wait-and-see approach with the company’s entrance into” these new markets.
A legacy solar company, First Solar (FSLR) designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects.
The world’s largest thin-film solar module manufacturer has production lines in Vietnam, Malaysia, and Ohio, and plans to add a large factory in India.
The company has pivoted back to its origins as a supplier of thin-film solar modules following the exit of its North American development business and its operations and maintenance business in 2021.
The company’s development business supported profits until 2017 when the module business faced challenges, but “margins in the business became compressed in recent years, and we think the company made a prudent decision to exit the U.S. development business in 2021,” says a Morningstar equity report.
Earlier this year, the company also announced plans to exit its Japanese development operations, as it completes its transition back to a pure-play module supplier.
Further, the company has increasingly become focused on select end markets for its sales efforts. “The U.S. …….