Goldman Sachs Says Investors Should Buy These 3 Solar Energy Stocks; Sees Over 50% Upside Potential
The recently passed Inflation Reduction Act (IRA) may or may not impact inflation – but it contains provisions that are certain to impact clean energy, and particularly the residential and commercial solar power segments.
In fact, banking giant Goldman Sachs believes the IRA is one of the most meaningful policy developments for the US solar and energy storage sector and clears the way for at least a decade-long runway for stable installation growth across all residential, commercial and utility-scale markets.
Looking out toward 2026, the Goldman team sees a compound annual growth rate of 18% for solar installations, fueled at least in part by the supportive provisions of the IRA.
Against this backdrop, we’ve used the TipRanks database to pull up three solar power recommendations by Goldman’s 5-star analyst Brian Lee. Lee has tapped these stocks as buying propositions, and sees them bringing 50% upside – or better – to table. Let’s take a closer look.
Enphase Energy, Inc. (ENPH)
We’ll start with Enphase Energy, a leading designer and producer of solar power inverters, a vital piece of hardware in all solar energy installations. Solar energy collected by photovoltaic panels is direct current (DC) power, which is not usable on the regular electric grid and other power infrastructure; inverters, Enphase’s chief product line, convert the DC power to usable alternating current (AC) power suitable for residential and commercial distribution. Enphase was one of the first companies to bring commercial scale inverters onto the market.
This company has not rested on its laurels as a leader in an essential niche; it also produces, in addition to its multiple lines of microinverter technology, energy storage systems for use with solar power installations. The IQ battery line makes use of ‘smart’ tech to control power loads and set distribution priorities among power-hungry appliances.
Over the past several years, as the combination of social and political will has promoted solar energy, Enphase has seen steadily rising revenues and earnings. In the last reported quarter, for 3Q22, the company had a top line of $634.7 million, up an impressive 80% and a company quarterly record.
At the bottom line, Enphase showed a GAAP net income of $114.8 million, up from $21.8 million reported in the prior-year third quarter. The non-GAAP income came in at $175.5 million. In per-share terms, GAAP diluted EPS was 80 cents; this was up from just 15 cents per share one year earlier.
Enphase has also been good at generating cash through operations, and reported a Q3 free cash flow of $179.1 million. As of the end of Q3, the company had $1.42 billion in cash and liquid assets on hand.
Putting this company’s operations into the setting of the IRA, analyst Brian Lee writes: “We see ENPH as potentially being a direct and near term beneficiary of manufacturing credits in the IRA. Specifically, the IRA includes domestic manufacturing credits for solar microinverters ($0.11/w). Assuming ENPH were to establish US capacity, ENPH would be eligible to capture the full amount of these credits, according to management. In addition, we believe ENPH is well positioned to benefit from the extension of the solar ITC which we believe will be supportive of a more stable demand environment for both residential and commercial solar and storage installations in the US.”
To this end, Lee gives Enphase shares a Buy rating, and his price target, set at $379, implies ~54% one-year upside potential for the stock. (To watch Lee’s track record, click here)
Overall, there are 17 recent analyst reviews available on Enphase shares, and these include 14 Buys and 3 Holds for a Strong Buy consensus rating. The shares are trading for $245.87 and their $330.59 average price target suggests a gain of ~35% on the one-year horizon. (See Enphase stock forecast on TipRanks)
First Solar, Inc. (FSLR)
The next Goldman pick we’re looking at is First Solar, another tech-oriented manufacturing firm in the solar power industry. First Solar, which has been in business since 1999 and is the largest US-based maker of photovoltaic panels, focuses on cutting-edge PV technology, from the manufacture of thin-film PV modules at commercial scale to the maintenance and recycling of spent panels. The company boasts it can manufacture 20+ gigawatts of panel capacity annually, and has spent $1.5 billion cumulatively in R&D over the years.
The most recent financial results for First Solar, from Q3 of last year, show net sales of $629 million compared to $583 million one year earlier, for a year-over-year gain of 7.8%. The company reported a net loss per share of 46 cents, a deep turnaround from the 42-cent EPS profit reported in 3Q21.
Despite the steep losses in the quarter, investors could take heart in other positive metrics. The company had $1.9 billion in liquid assets on hand at the end of the quarter, along with a record shipment backlog equivalent to 58 gigawatts.
Shares in First Solar began rising last summer, shortly before the IRA was signed into law but when it was clear that the Act would be passed and implemented. By the end of 2022, FSLR shares were showing a robust 72% 12-month gain, boosted in part by investor excitement at what the law could mean for the company.
In August of last year, shortly after the IRA was signed by President Biden, the company announced a $1.2 billion plan to scale up its American-based production of PV panel capacity.
Looking ahead, Goldman’s Brian Lee estimates a solid impact from the IRA on First Solar’s operations. He writes, “FSLR currently has ~3GW US capacity, positing the company as an immediate beneficiary of the IRA manufacturing tax credits. FSLR expects to reach ~7GW nameplate capacity in the US by YE2023 and ~10GW by YE2025. Assuming FSLR qualifies for the $0.17/w credits, we estimate that these credits account for ~60% of FSLR’s ASP, and the 10GW capacity would imply an after-tax benefit of ~$1.4bn/year.”
This reinforces the analyst’s view that FSLR is a stock to “buy,” and worth a $231 target price. At current levels, this target suggests ~61% upside for the year ahead.
Looking at the consensus breakdown, Wall Street takes a bullish stance on First Solar. 12 Buys and 5 Holds issued over the previous three months make the stock a ‘Moderate Buy.’ The stock is selling for $144.15 and has an average price target of $182.13, implying an upside potential of 26% for the year ahead. (See FSLR stock forecast on TipRanks)
Array Technologies, Inc. (ARRY)
The last stock we’ll look at now is Array Technologies. Array has built its niche around solar tracker technology, needed to keep photovoltaic panels properly oriented to the sun for maximum power production. The company’s tracker technology is used in utility-grade solar power projects, and the company’s DuraTrack, its flagship product line, has a leading reputation within the industry.
Array’s earnings have been volatile over the past few years, but the top line revenues have risen steadily through the last four reported quarters. The most recent quarterly report, for 3Q22, showed a company record of $515 million in revenue, more than double the $192 reported in 3Q21. Earnings were also solidly positive in 3Q22, at 19 cents per diluted share, compared to consensus estimates of 11 cents. As of the end of Q3, the company had a total workload, in executed contracts and awarded orders, of $1.8 billion.
This is another company that showed an immediate stock reaction to the IRA; in the weeks immediately before the signing of the Act, shares in ARRY jumped 81%, and they remain at that level today. Since the IRA was signed, the company has announced several major new projects, including a contract to supply the solar trackers in a 750 megawatt solar power project in Ohio.
Brian Lee writes of Array’s opportunities under the Act: “We see ARRY as an immediate beneficiary of demand tailwinds from the IRA, specifically the extension of the solar ITC at 30% for 10 years. The ITC should provide developers better certainty over the next decade of the unit economics of solar projects and should encourage strong, stable growth in utility-scale installations, in our view. The IRA also provides certain adders to the ITC whereby projects could receive a 10% bonus on top of the 30% base ITC if domestic content requirements are met. This could represent additional upside for ARRY as the company has noted it can source 90% of its BOM domestically, which could boost demand for ARRY trackers specifically.”
At his bottom line, Lee gives ARRY shares a Buy rating with a $29 price target that implies a gain of ~52% for the stock in the coming year. (To watch Lee’s track record, click here)
Overall, the 9 recent analyst reviews on ARRY add up to a Moderate Buy consensus rating, with 7 Buys, 1 Hold, and 1 Sell. The stock’s $26 average price target suggests a 36% one-year upside potential from the current $19.05 trading price. (See Array stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.