Via SeekingAlpha.com

This article first appeared on Trend Investing on May 14, 2020; therefore, all data is as of this date.

The consumer solar sector has been doing well the last couple of years helped by decreasing solar panel costs. In this article, I look at the solar sector and some of the better solar companies to consider.

A look at the solar sector

On average, solar is now one of the cheapest sources of electricity globally. This crossover point has only recently been reached, and it should serve as a very strong boost to the solar sector this decade.

Solar is now one of the cheapest sources of electricity in most locations globally

Trends In The Cost Of Energy | Peak Oil News and Message Boards

Source

Due to the current lower oil prices, Wood Mackenzie state in their March 2020 report titled: Could clean energy be the winner in the oil price war?:

Lower oil and gas prices is a benefit to solar. With a weighted average return of 6% IRR, oil and gas projects are now in line with average returns from low risk solar and wind project.

Source

Growth forecasts for the solar industry

  • IEA October 2019 Renewables report“(Global) Solar PV is set to more than double in capacity in the next five years….Solar PV alone accounts for almost 60% of the expected growth, with onshore wind representing one-quarter.
  • Statista – By 2023 global cumulative solar installations are forecast to reach 1.3 terawatts.
  • Wood Mackenzie forecasts US solar installations to double from ~2m now to ~4m by 2023.

Forecast of cumulative installations of solar PV capacity worldwide to 2023 (in gigawatts) – Set to double from 2019 to 2023

Source: Statista

Factors and countries driving solar adoption

  • Lower solar panel costs continue to support growing adoption.
  • Government subsidies support solar. Many countries give a subsidy to support solar as they wish to increase their renewable energy and reduce greenhouse gases.

Countries with high electricity prices such as Australia are leading the way. Germany and China are also major solar users, with the US lagging.

Rooftop solar in Australia is very popular with over 21% of homes having solar panels, compared to only ~2.5% in USA

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Global installation by region to 2050 forecast (exponential growth)

https://reneweconomy.com.au/wp-content/uploads/2017/09/world-primary-solar..jpg

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Globally, solar still has a huge potential to grow

Given that only about 1.8% of homes across the largest metro areas around the world have installed rooftop solar PV, the potential for future growth is enormous. In the shorter term, China is forecast to dominate growth, followed by Europe, and Asia Pacific. In later years, growth from India is forecast to be enormous.

Distributed solar PV growth forecasts by region 2019-2024

Source: IEA

US solar set to rapidly grow, but from a low base

In a recent 2020 US Renewable Energy Outlook report, S&P Global Market Intelligence state:

Electricity from renewable power sources is transforming the U.S. electricity grid. Compared to an average installation rate of 10.5 GW per year since 2010, wind and solar installations in 2020 appear likely to exceed 20 GW as developers take advantage of expiring subsidies. S&P Global Market Intelligence further flags nearly 36 GW of wind and solar capacity likely to be added across the country by 2021. Paired solar-plus-storage projects are also poised to foster a new era of renewables integration, with over 85 projects currently under development and more to come……..Examining the current pipeline of renewable projects across the U.S. shows that solar photovoltaic, or PV, is becoming increasingly popular, with almost 76,000 MW of projects in various stages of development — more than double the current installed capacity of 35,000 MW.”

Over the next 5 years, solar will see a tremendous amount of growth, with a forecast doubling of global solar installations. Solar is expected to outperform all other renewables in terms of growth. China, Europe, Asia Pacific, and North America will be the dominant growth regions in that order.

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Some global solar stocks to consider

Sky Solar Holdings Ltd. (NASDAQ:SKYS) – Price = USD 2.00

Sky Solar 5 year and 1 year price charts

The charts below show Sky Solar has fallen heavily the past 5 years; however, looks to be recovering the past two months.

Source: Bloomberg

Sky Solar Holdings Ltd. is a Hong Kong-based company that develops renewable energy assets and sells electricity. Along with subsidiaries, the Company develops, constructs, and operates independent power producer (IPP) solar parks. The Company sells electricity to the transmission grid under its IPP business model. In addition, the Company is also engaged in the sale of solar energy systems and solar modules, and the provision of operating and maintenance (O&M) services.

Sky Solar owns and operates more than 135 MW of solar parks located in Japan, Greece, Canada, the Czech Republic, Bulgaria, and Spain. Their pipeline includes more than 500MW of solar projects under development in countries such as Japan, Chile, Canada, USA, and Uruguay.

Solar parks/farms are rapidly becoming a huge and profitable business. You can read more on the top 5 largest global solar parks/farms.

As per the latest earnings report (H1 2019), Sky Solar is not profitable, reporting a revenue of $25.9 million, and a net loss of USD 13.9m. Revenue was $25.9 million in the first half of 2019, compared to $33.2 million in the same period of 2018. Noting that:

“The period-over-period decrease in electricity sales (revenue) was primarily due to the removal of solar parks with 71.7 MW of production capacity in Uruguay because the former Uruguay subsidiaries which held these solar parks are no longer consolidated into the Company’s financial statement.”

The solar parks’ removal was due to the Hudson Solar dispute, which has now been resolved.

As of June 30, 2019, the Company had bank balances and cash of $16.3 million, restricted cash of $26.3 million, trade and other receivables of $54.0 million and IPP solar park assets of $245.0 million. Total borrowing was $181.1 million, including $39.5 million of borrowing due within one year.

Sky Solar has a market cap of USD 42m and is not currently earnings positive.

Analyst rating is a ‘buy” with a price target of USD 12.50 (question on the accuracy of this PT). Risk is higher due to the significant debt, global operations, Hong Kong (not US) base, poor stock coverage and lack of recent data on the stock.

I like the stock due to the idea that solar parks are generally becoming increasingly profitable, especially if your debt repayments are manageable. I also like their expansion development from 135MW now to add an additional 500MW. I would need to research the stock further, but based on the analyst’s high target price, it looks most interesting, noting this PT may be out of date now, so should not be relied upon.

A Sky Solar park

Source

Azure Power Global Limited (AZRE) – Price = USD 16.25

Azure Power Global 5 year price chart

Azure Power Global 5 year price chart

Source: Bloomberg

Azure Power Global produces and distributes solar power. The Company also offers solar installation services. The Company sells energy to government utilities, and independent industrial and commercial customers in India. The company was founded in 2007 and is based in New Delhi, India.

Azure is in the right location at the right time, as solar in India is set to take off. During FY 2019-20, India has released a huge subsidiary to expand the residential rooftop PV installation market.

Azure has a market cap of USD 774m. 2020 debt is estimated at USD 962m Azure’s revenue is forecast is to almost double between 2020 and 2022, and the Company is forecast to become earnings positive from about 2023. Currently, the PE is therefore negative. Analysts’ consensus is a ‘buy’ with a price target of USD 21.70, representing ~33% upside.

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The stock looks to have good potential, but on the face of it looks to be trading a bit high, given the negative earnings and significant debts.

Azure Power Global financials and forecast financials

Source: 4-traders

SolarEdge Technologies Inc. (SEDG) – Price = USD 117.73

SolarEdge 5 year price chart

SolarEdge 5 year price chart

Source: Bloomberg (SolarEdge’s IPO was in March 2015 at USD 20)

SolarEdge offers an inverter solution for solar photovoltaic (PV) systems. The Company’s products include SolarEdge Power Optimizer, SolarEdge Inverter, StorEdge Solutions and SolarEdge Monitoring Software. The Company’s power optimizers provide module-level maximum power point tracking and real-time adjustments of current and voltage to the optimal working point of each individual PV module. The Company’s solution consists of a direct current (DC) power optimizer, an inverter and a cloud-based monitoring platform that operates as a single integrated system.

For those not familiar with SolarEdge’s inverters, they have a clear advantage over many of the competition. The advantage is that they do NOT use a string inverter. With a string inverter, the current falls to the level of the weakest link in a row of PV panels; however, with a SolarEdge inverter, there is no weakest link. Each panel operates ‘separately’ with its own power optimizer. This means if one panel fails, or shading is an issue, then the SolarEdge inverter system is able to still achieve great results with a PV array, unlike a conventional string inverter. This has made the SolarEdge inverter highly popular and outselling most of its competitors. In the US, SolarEdge has a 60.5% market share of the residential inverter market.

Another key factor with SolarEdge is their system enables the inverter to integrate with an electric vehicle [EV] charger.

SolarEdge has a market cap of USD 5.8b. The balance sheet is very strong with no debt and about US$555m in estimated cash. SolarEdge has a 2020 PE of 40.5 and 2021 PE of 26.7. 2020 net profit margin is forecast to be 9.93%, rising to 13.03% in 2021.

Analysts’ consensus is an ‘outperform’ with a price target of USD 123, representing 4% upside.

I like SolarEdge and rate them a buy on pullbacks, as the stock has had a terrific run since I first wrote on them back in Jan. 2016 in my article “Energy Storage – The Next Big Thing”, when they were $29.49 per share.

SolarEdge financials and forecast financials

Source: 4-traders

Enphase Energy Inc. (ENPH) – Price = 57.47

Enphase Energy 5 year price chart

Enphase Energy 5 year price chart

Source: Bloomberg

Enphase is a California headquartered company quite similar to SolarEdge, in that they specialize in superior inverters that are NOT string inverters, but focus on each individual module. There is a slight difference in that, instead of using power optimizers, Enphase uses microinverters to provide power conversion at the ‘individual solar module level’.

Wikipedia states:

Enphase Energy pioneered the concept of a microinverter. The basic idea behind a microinverter is to convert, manage and monitor energy per panel, rather than the entire array of panels.

In the US, Enphase has a 19.2% market share of the residential inverter market.

Enphase has a market cap of USD 7.2b. The Company has zero debt and about US$244m in cash.

Enphase has a 2020 PE of 62 and 2021 PE of 48. 2020 net profit margin is forecast to be 17.98%, and 16.81% in 2021.

Analysts’ consensus is an ‘outperform’ with a price target of USD 51.63, representing 10% downside.

I like the stock longer term, but would need a significant pullback before buying.

Enphase financials and forecast financials

Source: 4-traders

Note: Both Enphase and SolarEdge continue to expand their product offerings, and both have launched home energy platforms in recent years. These platforms are able to connect electric vehicles, solar-plus-storage, smart meters and home appliances.

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Invesco Solar ETF (TAN) – Price = USD 31.12

Invesco Solar ETF 5 year price chart

Invesco Solar ETF 5 year price chart

Source: Bloomberg

For those investors preferring to play the solar sector in general rather than an individual solar stock, the Invesco Solar ETF is a reasonable choice, especially after the recent COVID-19 falls.

It tracks the MAC Global Solar Energy Index and has an expense ratio of 0.71%pa. The Fund and the Index are rebalanced quarterly.

The fund has 24 holdings with the top 8 shown below.

Source

Invesco data show the current PE to be 26.43, and the 1-year forward PE as 13.85, with a distribution yield as 0.29% pa.

A solar farm in Netherlands that supplies Google data centers with power

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Tesla (TSLA)

Tesla does make solar panels, and they did absorb SolarCity. However, I mention Tesla more for their longer-term potential with solar roofs. Of course, if buying Tesla, today, you would need to be primarily bullish on their electric car business, interested in their energy storage business, and inquisitive about the potential of their embryonic solar roof business. The idea has great potential but is yet to really get going.

The Tesla solar roof is still beginning but has great potential

Source: Tesla.com

Risks

  • Competition risk – The solar industry is highly competitive, especially solar panels with China continually driving down prices. As a result, panel manufacturers can have very low profit margins.
  • Technology risk – Technology change within or outside the solar sector may take market share.
  • Other industry risks related to product production such as supply chain risk.
  • Sovereign risk.
  • Management and currency risks.
  • The usual stock and stock market risks – Debt, liquidity, sentiment.

Further reading

Conclusion

Global solar capacity looks set to double over the next 5 years. Given solar is now one of the very cheapest sources of electricity production, solar may do even better. China will lead the charge, with the US also forecast to grow fast from a low base.

The solar space has been a tough sector over the years for investors, especially when investors fail to understand some solar products such as panels are a commodity. The Chinese PV panel manufacturers continue to reduce prices, which essentially makes it very tough to invest in the panel manufacturers. Given the above, the stocks I have selected have avoided the panel manufacturers (the exception is those within the TAN ETF).

Risks revolve around competition and China’s dominance of the solar market constantly lowering prices.

My top four solar stocks to consider are Sky Solar Holdings Ltd., Azure Power Global Limited, SolarEdge Technologies Inc., and Enphase Energy Inc. For broader exposure, my pick is the Invesco Solar ETF (NYSEARCA:TAN). SolarEdge and Enphase have run up considerably in price lately, so timing a better entry point needs to be considered upon any significant pullbacks.

As usual, all comments are welcome.

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Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.