The Bright Future of Solar Companies in 2024: A Guide for Investors

As the alternative energy sector grapples with the challenges posed by high interest rates and political uncertainties, there is a ray of hope for investors looking to navigate these turbulent waters. Solar companies that specialize in building solar panels, sun trackers, and battery storage for large utility projects are poised to shine in 2024. In this comprehensive guide, we’ll delve into the current state of the renewable energy sector, explore the key players, and provide valuable insights for investors seeking opportunities in this dynamic industry.

The Current State of the Renewable Energy Sector

The year 2023 has seen renewable energy stocks face a significant setback, primarily due to the impact of high interest rates. Notably, the Invesco Solar ETF (TAN), a widely-watched barometer of the sector’s health, experienced a nearly 28% drop in value. However, there is a glimmer of hope as the renewable energy sector appears to have reached a bottom, with interest rates stabilizing. Despite this, a broad rebound may not be on the immediate horizon, according to UBS. The Federal Reserve’s signal of anticipated rate cuts in 2024 adds another layer of uncertainty.

Historically, the renewable energy sector has faced extended periods of low performance, with average downturns lasting 23 months. The current trough is expected to endure at least until the third quarter of 2024, due to the persistence of high interest rates, as noted by UBS analyst Jon Windham.

The upcoming 2024 presidential election introduces an additional element of uncertainty, particularly concerning the fate of Inflation Reduction Act (IRA) tax credits. While UBS believes these credits will remain intact regardless of the election outcome, the ambiguity surrounding this issue could keep some investors on the sidelines as they await clarity.

Winners in a Challenging Environment

In this challenging environment, certain manufacturers stand out as potential winners. Manufacturers exposed to utility-scale solar projects are considered less vulnerable to interest rate fluctuations than their counterparts in residential solar and wind. Goldman Sachs analyst Brian Lee encourages investors to “stay the course” in the utility-scale solar sector, anticipating double-digit demand growth in the coming year.

Jefferies’ Dushyant Ailani highlights the benefits of utility-scale solar, emphasizing that it provides manufacturers with a firm backlog, cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More certainty, and scale compared to residential solar. UBS identifies First Solar, Array Technologies, Nextracker, and Fluence as companies poised for substantial growth in 2024.

According to UBS, the utility-scale solar and battery markets are expected to grow by 12% and 50%, respectively, in 2024, while residential solar and wind may experience contraction. Utility-scale solar projects are relatively insulated from higher interest rates due to their long planning horizon and a backlog of orders.

First Solar: A Promising Investment

First Solar, a solar panel manufacturer, is expected to benefit significantly from IRA tax credits for domestic component production. With a manufacturing base in the U.S. and plans for expansion, First Solar is well-positioned to leverage these credits, estimated to be worth approximately $88 per share based on the company’s manufacturing roadmap, according to UBS.

UBS has given First Solar an overweight rating with a stock price target of $250, implying a 47% upside potential. The company has displayed reliability as an investment in 2023, with its shares outperforming the solar sector, even though they lag behind the broader U.S. stock market. First Solar’s consistent earnings growth, with a 57% increase in earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More in the third quarter of 2023 compared to the same period in 2022, further strengthens its investment appeal.

The company’s sales backlog through 2030 and sold-out status through 2026 provide a reliable business pipeline, reducing its vulnerability to market fluctuations.

Trackers and Batteries: The Key to Solar Success

As utility-scale solar projects expand, companies specializing in manufacturing sun trackers to orient panels towards the sun and batteries for energy storage are also well-positioned to thrive. Nextracker, the leading solar tracker manufacturer in the U.S., is expected to benefit from IRA tax credits, potentially increasing its gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More by 300 basis points for tracker deployments in the U.S., as per UBS.

Nextracker’s successful initial public offering in February, coupled with its 70% stock price increase since then, underscores its growth potential. UBS predicts over 5% upside for the company, with a stock price target of $52. An overwhelming 82% of Wall Street analysts rate Nextracker as a buy.

Array Technologies, another major tracker manufacturer, may see more than 70% upside, even with UBS recently lowering its price target by $3. The potential qualification for IRA tax credits in 2024 for domestically manufactured components could catalyze improved earnings, according to UBS. While two-thirds of analysts recommend buying Array, the consensus price target is slightly lower than UBS’s at $25.70.

Fluence: Powering the Future of Battery Storage

With battery deployments expected to grow by 50% in 2024 to meet increasing storage demands, Fluence stands out as a market leader. UBS forecasts a revenue growth of 20% to 40% for the company in 2024. Additionally, Fluence is poised to benefit from IRA domestic manufacturing tax credits as it ramps up production with U.S. contract manufacturer AESC, according to UBS.

UBS has a positive outlook on Fluence, with a 46% upside potential and a stock price target of $37. Fluence’s shares have experienced a 47% increase in value this year, and 68% of Wall Street analysts rate the company as a buy or overweight, with a consensus target of $32.46.

Challenges in the Residential Solar Sector

While utility-scale solar and battery markets show promising growth, the residential solar sector faces challenges. UBS anticipates a 10% contraction in this sector in 2024, with recovery dependent on the Federal Reserve’s rate cuts. Residential solar is more sensitive to interest rates, impacting monthly payments for households and reducing demand.

Sunrun and Sunnova, however, could emerge as relative winners in this challenging environment. Sunrun, with a 60% market share in leasing solar installations, has proven to be a viable option in a “higher for longer interest rate environment,” according to Jeffries. The firm has given Sunrun a buy rating with a price target of $25, suggesting nearly 30% upside from its last close of $19.26.

Goldman Sachs views Sunnova as poised for rapid growth among residential installers due to its diverse portfolio of loan, lease, and services offerings. This positions Sunnova to capture market share from competitors under pressure. Goldman upgraded Sunnova to buy from neutral, with a price target of $17, indicating more than 10% upside from the last closing price of $15.38.

Caution for Wind Investments

While the outlook is relatively positive for solar, the wind energy sector faces challenges. Onshore wind installations are expected to contract by 5% in 2024, primarily due to permitting delays and market saturation in geographically favorable regions, as reported by UBS. Piper Sandler goes further, foreseeing a continued stagnation for onshore domestic wind until 2026.

Political Uncertainties Loom Large

Aside from interest rates, political uncertainties surrounding the 2024 presidential election pose significant concerns for the renewable energy industry. Two key tax benefits for renewable companies, namely the IRA credit for domestic clean energy component manufacturing and the 30% investment credit for new clean energy projects, hang in the balance.

If President Joe Biden is reelected, preserving the status quo on tax credits is likely. However, expansion may be challenging given the potential for Republicans to win a Senate majority. A Donald Trump win and GOP sweep of Congress could lead to curtailed IRA tax credits, as Republicans might use the budget reconciliation process to make alterations.

There is a substantial amount of subsidies on the table, but Piper Sandler suggests that tax benefits unrelated to the renewable industry, such as electric vehicle credits, are at greater risk under a Trump presidency.

The domestic manufacturing tax credit carries significant weight in Republican districts, which may influence the provision’s fate even if the GOP controls Congress. Investment in IRA-supported manufacturing has already been announced in Trump counties, further emphasizing the importance of this issue.

While a complete repeal of IRA tax provisions is unlikely, the level of subsidies and potential uncertainty may deter some investors from the renewable energy sector in 2024.

Bottom-line: 2024 holds promise for solar companies operating in the utility-scale and battery storage sectors, with strong growth expected. Manufacturers like First Solar, Nextracker, Array Technologies, and Fluence are well-positioned to benefit from industry trends and tax incentives.

However, the residential solar sector faces challenges, and wind energy investments should be approached with caution due to permitting delays and market saturation. Political uncertainties, particularly related to tax credits, add another layer of complexity for investors.

As the renewable energy sector navigates these challenges, investors should carefully assess their risk tolerance and consider diversifying their portfolios to capitalize on the potential opportunities presented by solar companies in 2024.