It's always hard to divide hype from the structural trend. Renewable energy shares are prone to be overhyped, especially in the early stage of development. Investing at such a moment can cost a lot of money. On the other hand, there are real opportunities in this fast-growing sector. Especially solar is well-established and offers growth stocks at a reasonable price.
I dive deep into solar stocks and divide the hype from opportunity. Solar energy is on a secular growth path. It's the cheapest source of electricity when deployed on a utility scale.
Source: Wikipedia
The next step is to tackle the big challenge of energy storage. Energy storage is getting cheaper and a lot of companies are adding storage to their offered solutions.
Solar PV combines two advantages: module manufacturing can be done in large plants, which allows for economies of scale, and it is also a very modular technology and can be deployed in very small quantities at a time.
Source: IEA
Solar Is A Cyclical Sector
Solar proved to be a cyclical sector in the past. Supply and demand fluctuated which put pressure on margins. It seems the next couple of years could be fruitful now the sector isn't dependable on subsidies.
The cyclical nature of solar makes investments in solar companies volatile. While it was on the right side of the cycle in 2020, this could quickly change as commodity prices rise. The cyclical nature shouldn't matter too much for long-term investments. Some companies handle this better than others, especially those with a technological advantage.
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Solar Companies Overview
The ratios in the table are trailing twelve months.
| Company | Market Cap | PE | PS | Gross profit margin |
| Array Technologies (ARRY) | $3.76B | 60.9 | 4.13 | 23.2% |
| Canadian Solar (CSIQ) | $2.6B | 18.1 | 0.74 | 19.6% |
| Enphase Energy (ENPH) | $19.2B | 163 | 25.1 | 39.6%* |
| Daqo New Energy (DQ) | $5.64B | 46.6 | 8.33 | 34.6% |
| iSun (ISUN) | $141M | – | 6.7 | 11.1% |
| JinkoSolar (JKS) | $2.15B | 14.2 | 0.39 | 18.1% |
| First Solar (FSLR) | $8.74B | 22.1 | 3.22 | 26.3% |
| Maxeon Solar Technologies (MAXN) | $1.09B | – | 4.9 | 1% |
| ReneSola (SOL) | $875M | – | 7.56 | 26.1% |
| SolarEdge (SEDG) | $13.75B | 105 | 9.7 | 31.62% |
| SunPower (SPWR) | $5.80B | -* | 5.13 | 14.8% |
| Sunrun (RUN) | $10.4B | – | 8.41 | 20.2% |
| Sunworks (SUNW) | $322M | – | 3.88 | 10.4% |
| Sunnova Energy International (NOVA) | $4.18B | – | 21.11 | 59.6% |
*Adjusted for one-off items Source: SA
This list doesn't tell much as these companies operate very differently and address other parts of the sector. It shows there are large differences in valuation with P/S ratios ranging from 0.39 to 25.1. There are good reasons for these differences.
To dissect this list, I'll sort these companies into more or less comparable subsectors.
Manufacturers And Global Utility Projects
This part of the solar sector is interesting on valuation. These companies are still reasonably valued. The downside is the lower gross margin. It's tough to achieve a real moat in manufacturing which makes the producers focus on scale. This increased the market share of the top 5 module manufacturers to 65-70%.
The development of utility-scale projects is often a more complex business where these companies can make a difference.
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Canadian Solar: Cheap And Fast Growth
I wrote about Canadian Solar (CSIQ) before, check it for a more complete review. Canadian Solar is a global solar panel producer with module and system solutions produced in China. It also develops and sells utility-scale solar power projects and storage solutions. The company just released its fourth-quarter results that were better than expected despite commodities cost headwinds.
I believe the company is too cheaply valued. The company guides for a 70% revenue increase on the low end for 2021. It is planning an IPO on the Chinese market of the module and systems solutions business. This should unlock value as Chinese competitors are richly valued. This unlocks the capital for the planned growth and further vertical integration.
Daqo New Energy: Expensive, Best-In-Class
The Chinese Daqo New Energy (DQ) is a leading polysilicon manufacturer. It has one of the lowest cost bases to manufacture high-quality polysilicon and also manufactures photovoltaic wafers.
The company looks expensive at first sight. The prices of this necessary resource for photovoltaic panels have been high recently. This could increase Daqo's earnings massively.
Because of the commodity-like product, I am skeptical about Daqo. It trades at a high valuation and would suffer a lot from a downturn in the solar cycle.
JinkoSolar: Cheap And Chinese IPO Coming Up
JinkoSolar (JKS) is one of the largest solar module manufacturers in the world. It has a vertically integrated solar product value chain. It's focused on innovation, this increased profitability over the past couple of years.
The company is cheaply valued. It looks to unlock capital with a Chinese IPO. This makes me positive about the stock. The IPO could be a catalyst for a higher share price in 2021.
First Solar
First Solar (FSLR) is another large module manufacturer. It is based in the U.S. and mainly addresses the U.S. market. Protected by tariffs it achieves better margins than some of its close competitors. First Solar also develops and sells utility-scale solar power projects.
It uses a different technology than other large manufacturers, CdTe solar modules. These are more environmentally friendly than silicon-based technologies.
The company guides for a moderate growth pace of 5% to 10%. It seems fairly valued at the moment.
Maxeon Solar Technologies
Maxeon (MAXN) came to life as a spin-off of SunPower (SPWR) in 2020. Its earnings look abysmal due to a legacy supply contract it inherited from SunPower. This will hurt earnings in 2021 and 2022 as well. Besides this contract, the company has a pretty clean balance sheet.
It has close partnerships with SunPower and Total which should provide steady revenue streams.
Maxeon is actually reasonably valued and held back by the legacy supply contract.
Installation Companies
Installation companies are often focused on EPC: engineering, procurement, and construction services. There is a lot of difference between these stocks in focus, size, and additional services. Most stocks rose massively over the past year and look overvalued today.
Tesla (TSLA) is also a solar installer and producer. I didn't include it in the overview because Tesla isn't comparable to solar companies as the main business is electric vehicles. It has a competitive solution with energy storage. The company is not valued for its solar business.
iSun
iSun is a small company that recently came to life when The Peck Company changed its name after the acquisition of iSun with an all-stock transaction. The company raised cash with a direct offering in January, profiting from the high stock price.
It provides solar energy and e-mobility services. The main business is engineering, procurement, and construction services for solar projects in and around Vermont. It is expanding its geographic footprint to grow revenue.
The company's valuation looks reasonable as it predicts to at least double revenue in 2021. Together with margin expansion, this could turn out to be cheap at the moment. It's hard to assess how well management can execute.
ReneSola: Possible Turnaround
ReneSola (SOL) is a turnaround story. It quit manufacturing in 2017. A new CEO and CFO appointed in December 2019 are working on the turnaround. The company is now focused on developing and selling solar projects. It also operates some of these solar projects and plans to sell these. The cash will be used in higher-margin development projects.
It had a lot of capital increases over the past six months. Most recently, it raised $250M additional capital in January at $25 per ADS, far above the current share price. It wants to expand its pipeline and fund possible acquisitions.
ReneSola looks expensive based on valuation metrics. It has a significant cash position because of the share offerings. It will be interesting to see how it puts this cash to use.
SunPower
I analyzed SunPower before, so consider this an addition. SunPower produces solar energy solutions for the residential and commercial market in the U.S. In 2020, it spun-off Maxeon Solar and cleaned up the balance sheet. The company has a significant position in Enphase (ENPH). It has a clear growth path with storage solutions and an expanding market.
Despite improving margins, the company looks too richly valued today.
Sunnova Energy International
Sunnova (NOVA) provides residential solar and energy storage services. It also offers financial services along with solar offerings. This gives customers the choice between ownership, leasing, or just paying for the electricity provided. It makes the company a combination of a solar installer and a financing company.
It had a steady revenue growth over the past couple of years and has a strong growth outlook. Recently, it acquired Lennar's (LEN) SunStreet residential platform in an all-share deal. It also introduces new offerings like EV charging and energy management.
The company is hard to value as the financing aspect makes it more complex. The P/S ratio and earnings aren't suitable valuation ratios for Sunnova. A lot of value from its customers lies in the future. Based on the net contracted customer value metric Sunnova provides, the company looks richly valued at the moment. Given the strong growth outlook and excellent execution of the management, I believe the stock is priced fairly.
Sunrun
Sunrun (RUN) is the residential solar market leader in the US. Like a lot of competitors, it also provides energy storage solutions. It acquired Vivint Solar in an all-stock deal which closed in October.
Just as Sunnova, Sunrun also provides a net earnings assets metric. Using this metric, it still looks expensive to me. The company is richly valued and looks too expensive at the moment.
Sunworks
Sunworks (SUNW) provides engineering, procurement, and construction services to three lines of business: ACI (agriculture, commercial, and industrial), residential, and public works.
Peck Company Holdings, which changed its name to iSun after another acquisition, tried to acquire Sunworks with an all-stock deal. It failed as shareholders of Sunworks didn't approve the merger.
The company used the increased stock price to unload debt and add cash to its balance sheet with an “at the market” offering in December. The stock price surged further on the announcement of the new CEO Gaylon Morris.
The company looks unattractive to me at the moment. It's at a high price with unattractive financial metrics. It has a low margin and revenue shrank since 2016. The newly appointed CEO could be the start of a turnaround, this is already priced in.
Inverters: Enphase and SolarEdge
Inverters convert the solar panel DC power to usable AC power. These inverters are necessary for every solar installation. There are two investable companies in this solar niche that is discovered widely over the past couple of years by investors. There are two companies active in this niche: Enphase Energy (ENPH) and SolarEdge (SEDG).
Enphase has superior technology. It produces microinverters for residential solar systems. These provide a higher production rate, greater reliability, and intelligent options. This technological advantage translates to higher margins. It also produces a significant amount of free cash flow.*non-GAAP to exclude tariff refunds
The company is researching a new type of inverter for small commercial systems. With the IQ 8D, it is innovating and expanding its available market.
All these excellent features combined make Enphase one of the most beloved solar companies.
Both Enphase and SolarEdge are too richly valued in my opinion. They're great companies and active in one of the most interesting fields of solar power. Especially since they can make a difference with technology. The inverters they produce aren't commodity-like products. The price of these stocks is, however, too high and count on steep growth in future earnings and cash flows.
Other Technologies
Array Technologies
Array Technologies (ARRY) came to life through a successful IPO in October. The stock cooled down a bit since then, it is still up 34% since. Oaktree Capital unloaded about half the shares outstanding in two secondary offerings. Together with the general pressure on renewables, this brought the share down from its peak.
The company produces ground-mounting systems that track the sun throughout the day. This increases the energy generated by the solar panels. It's the leading manufacturer of these trackers for utility-scale energy projects. The company claims to have a superior product that secures its market-leading position.
The valuation seems reasonable around the current share price. The company was cash-flow negative in 2020 and should turn that around in 2021. In the 10-K, the company also mentions that operating cash flows will be enough to meet its future cash needs.
Renewable Energy Utility Companies
There are also several companies focused on operating renewable energy plants. I didn't include these as they aren't solely focused on solar and are quite different kinds of investments. They are often stable dividend payers and offer more stable growth.
Conclusion
There still are opportunities in the solar sector. I especially like Canadian Solar and JinkoSolar as these look reasonably valued. The recent drop in the renewable sector made solar stocks a bit cheaper. A lot of companies are richly valued.
I didn't include all solar stocks. This article is more focused on larger and more established companies. These offer more visibility in past and future earnings than some smaller stocks. The sector is susceptible to hype.
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