By Alex Kimani
- Morgan Stanley: clean energy stocks are on the cusp of a multi-year run.
- The Inflation Reduction Act will become a game-changer for the clean energy sector.
- Solar and hydrogen are especially popular in early 2023.
After a sizzling run amid the global energy transition, the renewable energy sector came unstuck in 2021 thanks to massive supply chain disruptions and steep valuations. The iShares Global Clean Energy ETF (ICLN), a catch-all bet on clean energy, finished deeply in the red for two years straight at a time when its much bigger fossil fuel cousin, the Energy Select Sector SPDR Fund (NYSEARCA:XLE), emerged as the best-performing of all 11 U.S. market sectors.
But the tide has turned, with the green sector managing to attract the smart money once again. Indeed, Morgan Stanley says the sector is on the cusp of a multi-year run. Morgan Stanley analyst Stephen Byrd writes: “We believe current valuations do not reflect the long-term robust growth and margin improvement that we see as a result of the IRA, driving our Attractive industry view… We highlight five themes impacting clean tech in 2023: (1) Focus on profitable growth and path to profitability, (2) IRA benefits materializing later than expected, (3) Supply chain easing in battery storage, driving strong growth and improved pricing, (4) Inflationary utility bills and deflationary distributed generation, and (5) Project announcements in green hydrogen.”
We have highlighted several of Byrd’s themes in our previous articles, particularly on how the Inflation Reduction Act (IRA) will become a game-changer for the clean energy sector and more recently on the EU’s hydrogen strategy.
Here are five clean energy stocks to play these themes.
- First Solar
Market Cap: $18.8B
12-Month Returns: 126.1%
First Solar Inc. (NASDAQ: FSLR) is the largest U.S.-based developer of solar panels, with a focus on utility-scale panels. Indeed, First Solar is the only U.S.-headquartered company among the world’s ten largest solar manufacturers.
First Solar will report Q4 2022 earnings on February 23; unfortunately, the company is expected to report another loss, with EPS projected to come in at -$0.17 compared to $1.23 for the previous year’s comparable quarter. The thin-film manufacturer posted an operating loss of US$68 million in Q3 2022, which it put down to ongoing supply chain disruptions. During the first quarter, First Solar had warned of a “challenging 2022 from an earning standpoint” as it continues to grapple with stubborn logistical issues.
Fortunately, this has not stopped the market from falling in love with FSLR, with the shares gaining 126.1% over the past 12 months and have kicked off the new year on a powerful note after putting on another 20.7% in the first three weeks of trading. There’s a method to the madness though: First Solar is expected to be one of the biggest beneficiaries of the IRA. The company received several upgrades on Wall Street shortly after the act was passed in August, including from JPMorgan, Deutsche Bank, Guggenheim and Needham.
Deutsche Bank loves First Solar’s solid booking backlog, noting that the company is fully sold out throughout 2025, and will be able to maintain its momentum as demand for vertically integrated U.S. manufactured modules is strong.
“Of all the names in our coverage, we believe First Solar appears positioned to benefit the most from the provisions of the Inflation Reduction Act that passed the Senate. Investors have not fully digested how transformational the IRA could be for FSLR’s business,” Guggenheim’s Joseph Osha wrote in a note to clients.
In November, First Solar unveiled plans to spend more than $1 billion to build a factory in Alabama that will manufacture solar panels. The factory is part of a plan to increase the company’s U.S. manufacturing capacity to more than 10 gigawatts by 2025.
- Array Technologies
Market Cap: $3.5B
12-Month Returns: 111.2%
Albuquerque, New Mexico-based Array Technologies (NASDAQ: ARRY) designs and manufactures solar ground monitoring systems.
We do not have an estimate of when Array will report Q4 2022 earnings. However, we love this stock after its latest resurgence. After a long slump, ARRY shares have been flying after analysts at Piper Sandler upgraded to Overweight from Neutral with a $28 price target, good for 20.4% upside, saying they foresee an improved forward outlook for the renewable energy firm. The analysts say they believe the company’s $1.9B order book, along with historical book-to-bill ratios, lay the foundation for a strong revenue and EBITDA growth going into CY 2023. The analyst also sees the solar tracking systems manufacturer as a beneficiary of domestic content requirements and manufacturing credits in the IRA.
Array Technologies went public in October 2021 and managed to surge 45% on its first day of trading despite its upsized IPO pricing. The IPO valued the company at about $2.79 billion, but the scorching rally nearly doubled that to $5B. Unfortunately, missed profit expectations have seen ARRY shares fall out of favor with the investing universe and the company now sports a market cap of $.3.5B.
- Enphase Inc
Market Cap: $31.1B
12-Month Returns: 78.3%
Enphase Energy, Inc. (NASDAQ: ENPH) designs, manufactures and sells home energy solutions for the solar photovoltaic industry in the United States and internationally.
Enphase Energy, Inc. is estimated to report earnings on 02/14/2023. According to Zacks Investment Research, based on 11 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.93, nearly double the $0.47 reported for the previous year’s comparable quarter.
ENPH shares have consistently outperformed over the long-term, returning an annualized 25% over the past decade. The strong runup has raised fears that the shares might be due for a correction. However, we believe the company’s robust growth record can offer a good measure of downside protection. Indeed, the consensus sales estimate of $704.92 million for the current quarter is good for +70.8% Y/Y growth while the $2.31 billion and $3.13 billion estimates for the current and next fiscal years translate to +66.8% and +35.6%, respectively. Further, Enphase is now profitable, a feat many solar companies struggle to achieve: the company’s ROCE (Return On Capital Employed) clocks in at 17%, better than the industry average of 15%.
- Bloom Energy
Market Cap: $5.2B
12-Month Returns: 62.3%
Bloom Energy Corporation (NASDAQ: BE) is a San Jose, California-based hydrogen tech company that designs, manufactures, sells and installs solid-oxide fuel cell systems for on-site power generation both in the United States and international markets.
Bloom Energy Corporation is expected to report earnings on 02/09/2023 after the market closes. According to Zacks Investment Research, based on 7 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.01, a big improvement from -$0.16 posted for Q4 2021.
Bloom Energy is one of Byrd’s top clean energy picks. Byrd notes that whereas Bloom’s quarterly results tend to be volatile, they tend to peak in the fourth quarter. Bloom reported top line growth of $292.3 million in Q3 2022, up 41% year-over-year and a company record for total quarterly revenue. At the bottom line, the GAAP EPS was a loss of 31 cents, relatively flat y/y. Byrd outlines notes several important trends that could bolster Bloom’s shares further in 2023, “We believe BE will benefit significantly from several key trends in 2023 including: (i) the growing ‘economic wedge’ or value proposition of distributed energy (i.e., fuel cells for C&I customers), (ii) rising grid instability, (iii) grid capacity limitations, and (iv) the $3/kg hydrogen tax credit included in the IRA,” he has written.
- NextEra Energy
Market Cap: $164.3B
12-Month Returns: 0.9%
NextEra Energy, Inc. (NYSE: NEE) and its subsidiaries generate, transmit, distribute, and sell electric power to retail and wholesale customers in North America.
NextEra Energy, Inc. is expected to report earnings on 01/25/2023 before the market opens. According to Zacks Investment Research, based on 3 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.49. The reported EPS for the same quarter last year was $0.41.
Whereas NEE has lagged its clean energy peers, it remains a sound defensive pick thanks to the company’s diversified portfolio of electric generation assets that provide stable and predictable cash flows. Utilities like NEE tend to perform relatively well when concerns about slowing economic growth resurface, and to underperform when those worries fade.