Solar stocks have had a great run so far this year. Strong demand, falling costs, and higher corporate investments supported these renewables in 2019. The Invesco Solar ETF (TAN) is up about 58% year-to-date, notably outperforming the broad market index S&P 500.
Many solar companies reported better-than-expected earnings in the first half of this year. Their respective management teams were upbeat and raised guidance for the rest of the year. Wall Street analysts also seem positive on solar stocks for the next few quarters.
Solar stocks offer solid growth potential
In this story, we’ll look at two solar names that appear well placed in the current scenario. Based on analysts’ estimates, solar panel maker First Solar (FSLR) stock has a mean price target of $77.10 against its current market price of $56.97. This indicates a potential upside of 35% for the next 12 months.
Of the 15 analysts tracking First Solar, three analysts recommend it as a “strong sell,” seven recommend it as a “buy,” and five recommend it as a “hold.” None of the analysts recommended the stock as a “sell” on October 8.
FSLR stock is up more than 35% so far this year, underperforming its peers. FSLR stock peaked to its 52-week high after the company increased its earnings guidance on August 1. However, since then it has corrected approximately 20%. The recent weakness in First Solar could be seen as an opportunity.
Wall Street analysts expect First Solar to report earnings per share of $1.19 in the third quarter, more than double than in Q3 2018. In Q2 2019, the company reported EPS of -$0.18. Apart from the bottom-line numbers, its management commentary for Q4 2019 and fiscal 2020 could drive its stock ahead. First Solar is expected to report its Q3 earnings on October 31.
A recent correction in First Solar stock has made it look attractive from a valuation perspective too. FSLR is currently trading 15x its estimated earnings for the next 12 months, which looks inexpensive compared to its peers. Its five-year historical average is about 22x. Given its estimated earnings growth for the next few years, First Solar stock looks attractively valued.
Solar microinverter maker Enphase Energy (ENPH) is one of the top gainers of 2019, rising more than 400% so far. Analysts have given it a mean price target of $31.10, which indicates a potential upside of 31% for the next year. Among the 10 analysts tracking Enphase, one recommended a “strong buy,” seven recommended a “buy,” one recommended a “hold,” and one recommended as a “sell.”
Enphase Energy stock started off this year below $5.00 and hit an all-time high of $35.40 in late August. Since then, it has fallen more than 30%.
Enphase Energy reported record earnings growth in the last three consecutive quarters. In Q3 2019, analysts expect it to report earnings per share of $0.25 against EPS of $0.04 in Q3 2018. Analysts expect significant earnings growth to continue in Q4 2019 and fiscal 2020.
Enphase Energy stock is currently trading at a price-to-earnings valuation of 25x its forward earnings. This looks a bit expensive compared to its peer solar stocks. But given the huge growth potential, we believe the current valuation looks warranted.
SolarEdge Technologies (SEDG), Enphase’s peer solar inverter maker, is trading at a PE valuation of 20x its estimated earnings. SolarEdge stock has rallied more than 140% so far this year. You can read more about SolarEdge stock in SolarEdge Stock Reaches All-Time High: Where to Now?
First Solar and Enphase Energy stocks collectively form 15% of the Invesco Solar ETF (TAN).
Strong demand for solar energy
The Solar Market Insight Report by Wood Mackenzie and SEIA, which was released last month, portrayed a promising picture of the solar industry. It estimated total PV (photovoltaic) installations to more than double in the country in the next five years.
Residential solar installations in the second quarter of 2019 grew 3% compared to the first quarter and 8% compared to Q2 2018. So, the strong demand for solar and production rampups could bode well for solar companies’ bottom lines in the next few quarters.
Solar companies are still in a somewhat emerging stage and can be considered relatively risky. Trade uncertainties and the global economic slowdown could have a negative impact on these stocks. The third-quarter earnings and the management outlook for the next few quarters should show us a clearer path for solar stocks going forward.