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Outline:
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- Intro
- Solar Sector Bull Case
- Solar Sector Bear Case
- How to Play Solar?
- First Solar
- SunPower
- JinkoSolar
- Invesco Solar
- Conclusion
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Intro
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As cool as harvesting desert power sounds, it's something we probably won’t see till Dune 3 or so. Our planet is begging us to decrease carbon emissions, governments worldwide are rushing to decrease dependency on Russian oil, and Paris convention targets won’t be achieved by themselves. If these events don’t propel companies in sustainable energy to create value, and for you to potentially profit from it, may Short Squeez burn under a solar flare storm.
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As the solar industry matures and becomes the need of the hour, there is a huge variety of investment opportunities. Before we dive into how to play the sector, let’s take a look at what seems to be working and not working for the solar industry.
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Solar Sector Bull Case
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Marginal adoption: In 2021, only ~3% of US energy came from Solar, with 21% YoY growth. Research indicates the potential of solar energy to produce 40% of US electricity needs. According to IHS Markit, installed photovoltaic (PV) capacity worldwide is expected to double in size over the next five years.
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Cut ties with Russia: The US imported ~$17.3 billion of Russian oil in 2021. This further increases the need for an energy alternative following Biden’s ban on Russian energy imports.
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Net-zero greenhouse gas emissions targets: Only 5 in 33 utility companies have emission intensities aligned with the Paris Agreement. Only 4 of the 30 largest US utilities have set net-zero greenhouse gas emissions targets for 2050. These utilities will eventually come around, surrender to fines and bad press or acquire some players in the green energy space.
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White House efforts: President Joe Biden has set a bold goal for the US to generate 100% carbon-free electricity by 2035, he is proposing extending current tax credits and making direct investments to accelerate the shift to clean energy.
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Solar Sector Bear Case
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High manufacturing costs, increasing further with inflation: The cost of solar panels increased by 16% in 2021 due to higher raw material costs. Lower costs are key to incentivizing companies and households to stand up from the couch and shift to renewables.
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Structural limitations - not always sunnier on the other side: While 1 in 3 households in Australia currently have solar panels and 100% adoption is expected by 2023, many states in the US just aren’t as sunny.
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Utility companies lobbying against solar: Of course utility companies are lobbying the government to make it harder for households to generate, store and use energy generated from their ceilings, which would cut into their profits.
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Rising interest rates: Higher rates increase financing costs, disincentivizing the shift out of traditional sources of energy.
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How to Play Solar?
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The stocks we’ve chosen cover a range of investment areas. First Solar gives exposure to a major US solar PV manufacturer, JinkoSolar gives exposure to a major Chinese solar PV manufacturer. SunPower is a tightly focused US household solar PV and energy management play. The Invesco Solar ETF gives a broader view of the industry.
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Below we provide an analysis of each of these stocks:
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- First Solar ($FSLR)
- SunPower ($SPWR)
- JinkoSolar ($JKS)
- Invesco Solar ETF ($TAN)
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1) First Solar
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First Solar is an American manufacturer of solar modules - aka panels - primarily selling to other businesses which either resell the solar modules to end-users or integrate them as an energy source for their own use.
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Bull Case
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Superior product : First Solar owns proprietary thin-film modules which perform better than competing silicon modules in less than ideal conditions such as low light and hot weather.
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Extensive capacity:
- US: Their new Gigafactory in Ohio scheduled to start operations in the H1 2023 will turn them into the largest fully integrated solar PV manufacturing company outside of China.
- India: Plan to open another factory in Tamil Nadu, India, by H2 2023, giving them exposure to the second-most populous country in the world and setting the grounds for a closer export base to the Asian markets.
- Europe: In Dec 2021 signed an agreement with European based PVO International to become its official distributor in Europe, providing them exposure to the area with the most ambitious green energy adoption targets.
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Catalysts
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- The expansion of production in the United States and India is expected to double the company's productivity (from 8 to 16 GW) and lower the production costs, reaching economies of scale with its innovative approach.
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Risks
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Capital intensive activities could go over budget, suffer delays, suffer from political or currency risks and other macro-induced risk factors.
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Push from competitors/expiration of tariffs - Most competitors are based in China (see chart below). In 2011, China was exporting panels below the cost of production, which led some US companies into bankruptcy. US then implemented tariffs of 250% of sales price on modules from China. If tariffs expire under the Biden admin, it could introduce additional Chinese import pressure on panel prices for First Solar.
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Key Metrics/Valuation (as of 4/25/22)
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Current share price: $72.45
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Wall St price target: $79.20
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Market cap: $7.7 billion
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2021 Revenues: $2.9 billion
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EV/NTM Sales: 2.5x
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EV/NTM EBITDA: 33.3x
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Wall St is predicting negative revenue growth for 2022 and ~25% growth for 2023 (see below).
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First Solar is the US solar company that analysts consider will benefit from favorable US Government solar policies. Multiples trade at a premium to competitors given its near-term prospects for utility-scale solar in both the US and internationally, amid a strengthening global effort to expand renewable energy to combat climate change.
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Conclusion
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The company offers upside potential as First Solar is on track to increase its production capacity by 30% through 2023. Main risk is competition from Chinese competitors who could circumvent US tariffs by shifting to other low-cost regions. In any case, First Solar already has pre-orders for 16.5 gigawatts until 2024, positioning the company as a good play for investors with a mid-term investment horizon.
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2) SunPower
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Sunpower is a US residential focused solar energy solutions company. It might sound too narrow when compared to First Solar geographically, but Sunpower is more vertically integrated, offering energy storage + PV cells + power management solutions + virtual power plant developments + they are soon integrating a battery for electric vehicles + financing solutions.
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Bull Case
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Residential tax tail-winds: Leverage Washington bill that incentivizes US households to shift to solar energy with $300 billion in tax cuts:
- Federal tax credit: the ITC will provide a 26% tax credit for systems installed between 2020-22, and 22% for systems installed in 2023.
- Each state has its own set of solar incentives that vary significantly. NY for example offers an additional 5% tax credit for 4 years for a total additional 20% discount.
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Catalysts
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- US consumers jumping on the wave of green energy sourcing.
- Growing revenue streams from Enphase, a company that provides exposure to solar energy software and EU markets. SunPower owns 5.6% of Enphase. Enphase annual revenue increased 77% over 2021 to $1.4 billion.
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Risks
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Centralized electrical utilities that are already connected to consumers' homes could make a push to distribute solar energy.
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Financing competition - Consumers getting loans from their personal banks, competitor solar installers or federal programs.
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Increasing residential competition – from large solar companies and smaller regional companies could intensify leading to pricing pressures and lower return on capital.
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Key Metrics/Valuation (as of 4/25/22)
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Current share price: $17.66
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Wall St price target: $21.54
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Market cap: $3.1 billion
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2021 Revenues: $1.3 billion
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EV/NTM Sales: 2.0x
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EV/NTM EBITDA: 30.9x
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Trading at a discount to residential solar peers (Sunrun, $RUN, and Sunnova, $NOVA) who are engaged in lease, loan and PPA financing. SPWR is currently pushing for this market and could close the valuation gap over time.
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Conclusion
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Stock offers upside given its positioning as a big player in the residential market and growing tailwinds in the sector. With policies in place to reduce solar energy costs and assuming constant growth rate of adoption, the company is set for growth.
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3) JinkoSolar
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Chinese manufacturer of high-performance solar PV panels, with 22.2 GW of module shipments in 2021, up 18% year-on-year.
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It has 12 production facilities, and 22 overseas subsidiaries and primarily sells in China, US, Germany, Italy and Japan.
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Bull Case
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China demand: Chinese solar PV demand in 2022 is expected to surpass 100 GW. Jinko had a capacity of 19 GW for solar cells, and 36 GW for solar modules as of September 2021 showing room for growth.
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Russian invasion of Ukraine has produced a big increase in interest from Europe in JinkoSolar’s products. JinkoSolar ships to 30 countries in Europe, and India.
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Catalysts
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- Partnership with the world’s largest lithium-ion battery manufacturer (CATL) will improve efficiencies and increase operating margins.
- Provides charging infrastructure for EVs, whose sales exploded 154% in China last year.
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Risks
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- Washington to review solar panel imports from companies working in Southeast Asia.
- The big concern for US investors is that JinkoSolar is a Chinese company and recently it listed a principal operating subsidiary, Jiangxi Jinko, on the Shanghai stock exchange.
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Key Metrics/Valuation (as of 4/25/22)
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Current share price: $52.18
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Wall St price target: NA
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Market cap: $2.5 billion
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2021 Revenues: $6.4 billion
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EV/NTM Sales: 0.8x
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EV/NTM EBITDA: 10.0x
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Only solar stock with positive YTD returns,+14% (YTD: S&P 500: -12%; NASDAQ: -20%) but as cliché as it sounds, past performance is no guarantee of future results. With China coming under increasing scrutiny in the US, with added global currency and political risk cocktail, this one might be one of those that burns when swallowed.
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4) Invesco Solar ETF
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If you want exposure to solar energy but are worried of getting burnt (pun intended), the Invesco Solar ETF provides exposure to all the above stocks. Top holdings:
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Conclusion
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The solar industry is expected to grow from a niche industry today to a major energy provider in the not too distant future.
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Falling solar hardware costs, government subsidies, and a growing consensus among investors, politicians, and industry leaders are driving the move to a lower-carbon global future, which is propelling the growth of the solar industry both in the US and across the world.
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Energy has historically served as a hedge against inflation. It is hard to reach firm conclusions about which stocks will outperform in 2022 and beyond. In any case, it might be a good idea to get some $TAN exposure even before the European summer kicks off.
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Sources
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- https://www.nasdaq.com/articles/first-solar%3A-boosted-growth-ahead
- https://www.nrel.gov/docs/fy16osti/65298.pdf
- https://finance.yahoo.com/news/world-biggest-solar-firm-sees-130244621.html
- https://csimarket.com/stocks/markets_glance.php?code=FSLR
- https://seekingalpha.com/article/4498218-fslr-potential-for-revenue-and-earnings-surprises
- https://www.voanews.com/a/us-to-investigate-use-of-chinese-materials-in-imported-solar-panels-/6515081.html
- https://www.marketscreener.com/quote/stock/FIRST-SOLAR-INC-37008/financials/
- https://www.nasdaq.com/articles/first-solar%3A-boosted-growth-ahead
- https://seekingalpha.com/article/4499018-is-sunpower-good-stock-buy
- https://programs.dsireusa.org/system/program/detail/3037/new-york-city-property-tax-abatement-for-photovoltaic-pv-and-energy-storage-equipment
- https://newsroom.sunpower.com/press-releases?item=123221
- https://www.sierraclub.org/press-releases/2022/03/president-biden-must-close-commerce-s-solar-panel-investigation-and-invest
- https://www.fool.com/investing/stock-market/market-sectors/energy/solar-energy-stocks/
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