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The Solar Revolution

Solar power has gotten increasingly cheaper over the past 10 years, bringing its costs to the same level or below that of fossil fuels. This was thanks to a combination of technological advances (more efficient panels), better manufacturing practices (more automation), and the scaling-up of the industry (spreading fixed costs on larger production batches).

This decline in costs has affected most renewable power sources, but none as strongly as photovoltaics.

Source: Research Gate

The last obstacle to the mass adoption of solar power is the problem of intermittency and a mismatch of production time (peaking mid-day) and consumption time (peaking in the evening). With quickly decreasing costs of batteries, this should progressively become less of a problem and help sustain the growth of the photovoltaic market. The battery market is expected to grow by 24% CAGR from 2023 to 2031.

Source: Canadian Solar

A Massive Market

The global solar market has reached $94.6B in 2022, still only a small fraction of the world’s total energy market. It is because most of the world’s energy is not used for power generation, but transportation, heavy industry, chemistry, fertilizer production, and all of these processes still rely massively on fossil fuels.

Source: EIA

So renewables have come a long way, but are still to conquer 80% of energy demand from non-renewable, non-nuclear + hydro energy sources. This explains why the solar market is projected to grow by 12.3% CAGR, reaching $300B by 2032.

Currently, it is a market dominated by China, which manufactures 97% of silicon wafers that go into solar panels, and controls most of the supply chain for other components like special glass and rare earth minerals.

Top 10 Solar stocks

First Solar, Inc. (FSLR)

First Solar is the largest solar panel manufacturer in the USA and in the whole Western hemisphere, with manufacturing sites in the US, Malaysia, and Vietnam.

The company is not using the classic crystalline silicon technology, and instead uses its proprietary thin-film photovoltaics. Based on cadmium-telluride, they are more efficient, are produced at a lower cost, and can be easily mass-manufactured. Thin-film solar panels are also more durable, retaining 89% of the original performance after 30 years.

Source: First Solar

Cadmium and telluride are byproducts of the mining for other metals, which means that First Solar products have a minimal impact, using resources that were of little use before. Thin-film panels can also have high recycling rate.

First Solar’s technological edge, combined with its geographical location, makes it the likely beneficiary of the growing push for Western countries to source their panels from out of China. The company is ramping up its production capacity quickly, aiming to reach a capacity of 16 GW, from the current 8 GW.

SolarEdge Technologies, Inc. (SEDG)

SolarEdge is a provider of solar-linked equipment like inverters, batteries, EV chargers, etc… It monitors 3.3 million systems worldwide, worth 43.6 GW of capacity, making it the 1^st solar inverter company in the world by revenues.

These equipments also come with a full software set of mobile apps, cloud offers, monitoring software, connected devices, and power meters.

The company is working on launching a utility offering, with scaled-up inverters, power storage, and cybersecurity and data offering.

Source: SolarEdge

Its storage solution relies on a proprietary battery cell technology with a dedicated manufacturing capacity. On the EV front, SolarEdge is also already providing the powertrain units and batteries for the Fiat E-Ducato made by Stellantis (Fiat, Peugeot, Citroen, Jeep, etc…). Both capacities were achieved through R&D, but also the acquisition of Korean battery producer Kokam in 2018, and Italian EV powertrain SMRE in 2019.

The company has grown its revenues by 35% CAGR between 2018-2022.

While less in the focus of investors than the more visible solar panels, inverters, and associated systems are not less complex nor less profitable. So investors can rely on SolarEdge to be a prime beneficiary from falling costs pushing many individual homes, apartment associations, and companies to install more photovoltaic capacities. Finally, the new business lines of batteries and EV powertrains are now mature enough to reach the market and create new growth opportunities.

Sunrun Inc. (RUN)

Sunrun is the leading residential solar company in the US, after a merger with solar installer Vivint Solar in 2020. One of the key methods used by Sunrun to achieve this position is offering people to lease their panels instead of purchasing them outright. This removes the need for bank loan approval and reduces significantly the obstacle for people to install rooftop panels on their homes.

Sunrun has grown its customer base by 21% CAGR since 2008, reaching almost 800,000. The company operates “only” in 22 states, with a large market still untapped.

Source: Sunrun

Thanks to its massive scale and the number of solar installations it controls, including batteries, it started “virtual power stations”. This allows Sunrun to coordinate the release or storage of energy depending on grid demand, in partnership with PG&E.

Sunrun also has a partnership with Ford for creating and installing a dedicated EV charging solution for the F-150 truck.

Thanks to its leasing business model, Sunrun is less vulnerable to consumer hesitancy during a recession and also can count on regular revenues stream instead of depending on making money from new installations. Access to capital in the context of high-interest rates can be an issue, but it should hurt Sunrun competitors more, as Sunrun will be able to capture more consumers interested in solar, but unable or unwilling to take a solar loan directly.

Enphase Energy, Inc. (ENPH)

Enphase’s core product is micro-inverters, replacing the central inverter commonly used in solar installation. Inverters are required as solar panels produce DC electric current, which needs to be converted to AC current.

By virtue of being smaller, micro-inverters are safer and manage much smaller electric charges, and can rely on methods used in semiconductor manufacturing, progressing rapidly, instead of more classic power electronics.

Source: Enphase

It also offers a battery system, and bi-directional EV chargers (allowing the house to power the car, but also the opposite). It is expanding its software offering as well, all through a series of acquisitions in 2021 and 2022.

Source: Enphase

Enphase does not manufacture directly its micro-inverters, preferring a capital-light business model focused on R&D and marketing, subcontracting the manufacturing part. This makes it a good stock for investors looking for high returns on capital and high growth potential, as Enphase can rely on the entire semiconductor industry to scale up production, instead of needing to build its own dedicated manufacturing facilities.

Shoals Technologies Group, Inc. (SHLS)

Shoals is specialized in EBOS (Electrical Balance of System), or all the systems surrounding the solar panel themselves and which a required to make it work. This does not include inverters, but cables, switches, fuses, etc…

Source: Shaols

This segment benefits from the growth in solar installation, while not being under the same pressure for cost reduction as the panels themselves. This is because they represent less than 6% of the total system cost, with no component above 1% of the total cost. The sector also benefits from the retrofitting of older solar installations, as well as extra connection to new systems like batteries and EV chargers.

Source: Shaols

At the same time, suppliers are unwilling to take any chance with less reputable suppliers, as even very cheap components can cause catastrophic failures like fire, injury, or death. So this is a sector where established providers have a solid economic moat in the form of substitution costs.

Finally, Shaols’ unique offer is the pre-assembled “Plug’n’Play” system, allowing solar installations to be assembled without costly and hard-to-hire licensed electricians. This innovation is protected by 66 patents “limiting competitors’ ability to develop products that can replicate the benefits provided by Shoals. The same concept is now being deployed for EV charging stations.

Between 2020 and 2022, Shaols has grown its revenues by 36% CAGR and its gross profit by 40% CAGR.

Source: Shaols

By focusing on a niche market with less innovation and competition than inverters or solar panels, Shaols has carved a profitable business line for itself that is now well established. This might be appreciated by investors looking for a “pick and shovel” stock in the solar industry and unwilling to bet on a specific technology regarding the more contested battlefield for innovation on solar panels, inverters, or batteries.

Daqo New Energy Corp. (DQ)

This Chinese company is one of the world’s leaders in polysilicon production, the central component for solar panel manufacturing. This also makes Daqo one of the founding pillars of China’s domination over the solar manufacturing sector.

Daqo being at the center of the solar panel supply chain made it benefit greatly from the sector growth, with revenues growing from $0.68B in 2020 to $4.6B in 2022. After a surge in 2022, polysilicon prices have now cooled down.

The company’s communication and website are a little lackluster, but not out of character for an industrial B2B company, more focused on its image inside the industry than with the larger public or foreign investors.

In 2023, the stock is trading very cheaply compared to P/E or cash flow. This is partially due to controversies, with the company linked to the use of forced labor in Xinjiang, and talks in Washington DC of additional sanctions against companies operating in the region.

So investors should be aware that Daqo stock carries a very real geopolitical risk, as well as a large upside due to low valuation multiples.

Array Technologies, Inc. (ARRY)

Most solar systems on rooftops are fixed, staying at whatever angle and direction the roof itself is located. But for utility companies, being able to catch more of the early morning and late afternoon sunshine is very important.

Not only does it help boost overall production, but it also provides extra green energy during peak consumption hours, periods of the day with potential production shortages and often high power prices.

Source: Array Technologies 

Array Technologies has developed a solar tracker that moves the solar panels over the day, increasing energy production by 25% while increasing costs by only 11%. This alone can bring the levelized cost of energy down by 21%, something that requires massive technological progress if coming from photovoltaic efficiency.

This is a very quickly growing market, growing 36% faster than the already strong overall solar market.

This is also something viable for most solar panel systems, and ground mount solar is 6x the size of the more visible residential market, with 660 GW of solar tracker installations expected globally from 2022 to 2030.

By acquiring the European leader in solar tracker LTI Solar, Array Technologies is becoming the global leader in solar trackers, with 42 GW shipped or installed, or 23% of the installed utility-scale capacity in North America, Europe, LatAm, and Australia.

Investors looking to capitalize on utility-scale solar becoming the primary source of energy to the electric grid can count on Array Technology to be involved with many, if not most of the new solar power plants being built.

JinkoSolar Holding Co., Ltd. (JKS)

Jinko is one of the largest solar panel manufacturers in the world, based mostly in China. The company is diversifying its manufacturing base, with silicon wafer manufacturing in Vietnam, and solar cell manufacturing in Malaysia and the US.

Jinko has delivered in the company’s whole history a total of 130 GW of solar cells, and aims for no less than 60-70 GW deliveries in 2023 alone. Module shipments to China have doubled year-to-year, and increased 50% for Europe.

Jinko’s most advanced solar cell, the N-type, achieves a remarkably high 25.8% energy efficiency. In 2023, the N-type is expected to take over most of Jinko’s sales, representing 60% of the whole.

The company has seen a decline in total shipments in Q1 2023, but with Q2 2023’s shipments are expected to climb back to the all-time highs of Q4 2022. Gross margins have stayed stable at around 14%-17%.

Source: Jinko 

Canadian Solar Inc. (CSIQ)

Canadian Solar is one of the top 5 of the world’s largest solar panel brands, having grown shipments by 30% annually since 2013.

In 2022, it shipped 21.1 GW of solar panels and 1.79 GWh of batteries. Its revenues were roughly half from North America and China, and half from the rest of the world.

Source: Canadian Solar

The core of the company is solar cell manufacturing, with 94 GW of cumulative shipments. Cumulative shipments of batteries were 2.7 GWh.

It also builds and operates solar power plants and utility-scale battery storage, 25 GW in solar project pipeline, and 47 GWh in battery storage pipeline. This represents a very strong growth, with 2023 solar module shipments 50% up from last year, and the contracted pipeline for batteries triple of 2022’s numbers.

Source: Canadian Solar

Canadian Solar is a good option for investors looking for a Western-based company with a leading position in solar panel manufacturing, avoiding all the potential geopolitical risks of China-based companies.

Sunlight Financial Holdings Inc. (SUNL)

With solar installation being a significant one-time cost, most consumers rely on some sort of financing to manage this purchase. While some will choose to lease, like with Sunrun, others will turn to specialized companies like Sunlight.

It has funded $7B in loans in total, reaching more than 70,000 customers (average loan of $42k).

Sunlight functions as a middle-man, and does not directly provide the loan. Instead, it connects the final customers, usually through its network of solar installers and providers, and connects them to a bank or another financial institution looking to give out solar loans. Sunlight earns $1k-$2k for each transaction.

Due to the central part of solar installers in this business, model, the continuous growth of the network from 1,208 in March 2021 to 2,070 in March 2023 is encouraging.

Source: Sunlight Financial

The total volume of funded loans per quarter has stayed roughly stable from 2021 to 2023, with the growth of the installer network compensated by a difficult environment with rising interest rates.

This tense situation for Sunlight is likely to persist as long as the Federal Reserve is rising interest rates, with negative net income, and following a massive goodwill impairment of $384M in Q3 2022.

Still, the growth of the solar market has been solid, and the company might offer a strong opportunity (and risks) for daring investors at its current low stock prices if it manages to bounce back.