Energy prices have been going up, as a large part of an inflationary trend that has been gathering speed in recent months. Oil and gas prices are up significantly; natural gas has more than doubled since the spring, while crude oil prices are by about one third. The immediate result is higher prices at the pump – gasoline is up by more than $1 per gallon, on average. But we’re heading into winter, and higher fuel prices promise higher heating costs just as the cold weather is getting started.
Given current Administration policies – Biden has pledged to reduce production and use of fossil fuels – these price hikes are likely to stay with us for a while. And for investors, it’s opening up an unexpected avenue of opportunity. With higher home heating prices looming just ahead, makers of residential solar installations are seeing signs of increased demand – and along with that, a bump in share prices.
For the solar power companies, the bump in share value has come along just in time. These stocks were hit hard by reduced consumer demand during the COVID crisis, and in the first half of this year they saw steep drops in share price. In this past month, however, increased investor interest has pushed up their stock prices. While residential solar installations won’t displace the full economic role of fossil fuels for power and heating, they do allow individual homeowners to make a long-term investment that may mitigate the impact of fuel inflation.
So it’s an interesting time to look at residential solar power. BMO analyst Ameet Thakkar, an expert in the energy sector, has been selecting the equities he see gaining in the next 12 months. We ran the three through TipRanks database to see what other Wall Street’s analysts have to say about them. Let’s take a closer look.
Sunnova Energy (NOVA)
First up is Sunnova, a leader in the US market for residential solar and energy storage solutions. The company aims to provide its customers with clean, affordable, reliable energy, to create energy-independent homes. Sunnova got its start in 2012, and now boasts over 162,000 customers in 33 states.
Sunnova’s shares peaked in January of this year, and have since come under heavy pressure. The stock is down 34% from that high point – but in recent weeks, it has rebounded 16%. These recent gains are likely linked to some of the factors given above, but they are also correlated with strong revenue performance in the second quarter. Q2’s top line of $66.6 million was up 55% from the year-ago quarter, and an even more impressive 61% sequentially.
The higher revenues were driven by strong organic growth. The company added 12,700 new customers in Q2, to hit a total customer base of 162,600. This compares favorably to the 8,500 customers added in Q1. Sunnova also reported $629 in liquid assets as of the end of 1H21. On the negative side of the ledger, Sunnova saw earnings decline; the company usually runs at a net loss, but that deepened in Q2 to 57 cents per share from 31 cents in the first quarter.
BMO’s Thakkar writes of Sunnova: “NOVA offers exposure to the fast-growing U.S. residential solar market that is energized by government policy goals, EV adoption, and demand for energy storage. We believe the company’s expanding dealer network should drive substantial operating leverage from an increasing pool of contracted customer cash flows. The typical NOVA solar agreement period of 20-25 years, with the majority of costs incurred in the first year, results in greater profitability and cash flow visibility in subsequent periods.”
In line with these upbeat comments, Thakkar rates NOVA an Outperform (i.e. Buy) rating, and a $50 price target that implies an upside of 31% for the coming year. (To watch Thakkar’s track record, click here)
The Strong Buy consensus rating on NOVA shares is based on 10 recent reviews – which include 9 to Buy and just 1 Hold. The stock is selling for $38.10 and its $51.80 average target is even more bullish than Thakkar’s, suggesting a one-year upside potential of 35%. (See NOVA stock analysis on TipRanks)
NOVA has a rare bullish outlook according to the Street. TipRanks reveals that in the last three months, NOVA has received 9 buy ratings and just 1 hold ratings – giving it a Strong Buy analyst consensus. Meanwhile, the $51.80 average analyst price target translate into 36% upside potential from the current share price. (See NOVA stock analysis on TipRanks)
Enphase Energy (ENPH)
The next stock on our list is ENPH, Enphase Energy. This is a manufacturer of solar microinverters, a key component in solar power photovoltaic systems. Microinverters convert the direct current (DC) electrical energy from the solar panel into alternating current (AC) energy that is compatible with electric transmission grids. Enphase is a market leader in microinverter production, a position it claimed by being the first company to commercialize the component at a large scale. The company saw $774.4 million in revenues in fiscal year 2020.
Since the company’s founding in 2006, it has sold and installed over 36 million microinverters in more than 1.5 million residential and business power systems. The company has seen its products evolve through 8 generations, and holds over 300 patents on inverters and related technology. In recent weeks, the company has announced expansion of its operations into Italy and Brazil.
Enphase will report Q3 earnings later this month, but short look back at the Q2 numbers may be illumination. Revenue was up – for the fourth consecutive quarter. The top line hit $316 million, and the company shipped out more than 2.36 million microinverters. Earnings came in at 28 cents per share, up dramatically from the 38-cent loss recorded in the year-ago quarter. The recent earnings peak came in 4Q20, at 50 cents per share, and the stock price peaked in Feb above $200. ENPH is down 20% from that level – and up 19% so far in October.
BMO’s Ameet Thakkar sees plenty of reason for optimism in Enphase, noting: “We are bullish on the distributed solar generation subsector within the broader Energy Transition Universe due to several emerging megatrends… The investment case for ENPH is straightforward and compelling as we see meaningful earnings growth (30% CAGR 2020-2025) driven by increasing solar adoption rates, increased revenue per customer site (battery + EV), entry into small commercial markets and accelerating international growth for the company’s industry leading inverter technology…”
These comments support Thakkar’s Outperform (i.e. Buy) rating, and his price target sees the stock returning to the $200 level in the coming year, a potential gain of 12%.
Overall, Enphase has received 9 recent reviews, 8 to Buy against 1 to Hold, for a Strong Buy consensus rating on the stock. The share price of $178.24 and the average target of $200.75 give an upside potential of 12% for the next 12 months. (See ENPH stock analysis on TipRanks)
SolarEdge Technologies (SEDG)
Last on our list, SolarEdge Technologies, is a direct competitor of Enphase. SolarEdge produces inverter systems, as well as power optimizers and monitoring systems for photovoltaic solar power arrays. The company is based in Israel and maintains offices in the US, Germany, Italy, and Japan.
SolarEdge markets its products in both the residential and commercial sectors, and to date has 2.15 million monitored systems installed worldwide. SolarEdge has customers in more than 130 countries, to whom it has shipped out, over the years, more than 25.7 gigawatts of solar power generation.
In its most recent quarterly report, for 2Q21, SolarEdge reported over $480 million in total revenues; the company’s solar segment brought in $431.5 million of that total. These were record numbers for the company, and the total revenue was up 45% year-over-year. The EPS, of 82 cents, was up 17 cents from the year-ago quarter. The company saw its cash flow improve from $24.1 million in Q1 to $38.7 million in Q2, and it reported having $509.3 million in cash on hand as of June 30 this year.
SolarEdge stock hit its peak in January of this year, and showed the same pattern as the other stock on this list – a significant fall in the first half of the year, with gains more recently. The stock is down 16% from its peak, but up 17% so far in October.
BMO’s Ameet Thakkar likes what he sees here, writing: “SEDG offers investors a compelling way to play multiple energy transition themes: Growth in solar capacity across all customer classes (residential, C&I and utility scale), supply of ESS/ UPS power, and an emerging electric vehicle supply business with all of these lines of business having a strong international presence. SEDG’s core inverter product is becoming an increasingly important part of a fast growing solar market.”
Thakkar’s rating on the stock is Outperform (i.e. Buy), and his price target of $357 implies an upside of 17%.
Overall, SolarEdge gets a Moderate Buy rating from the analyst consensus, based on 17 reviews that break down to 13 Buys, 2 Holds, and 2 Sells. The stock’s $322.20 average price target indicates room for a modest 5% upside from the current trading price of $305.13. (See SEDG stock analysis on TipRanks)
To find good ideas for solar stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.