Why solar stocks are crushing the market in 2020

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Don’t look now, but solar energy stocks are crushing the market – and fossil fuel stocks – in 2020. This follows years of underperforming most solar energy stocks and a year in which there were concerns that the pandemic could bring the industry to a halt.

But instead of bending under the pressure of economic uncertainty, solar stocks have exploded. There are a number of reasons for this, and it’s worth understanding what is sustainable in the years to come and may continue to drive up solar energy stocks.

FSLR given by YCharts

The pandemic was not what we thought it was

In the spring, there were concerns that the COVID-19 pandemic could be a huge burden on the solar industry in 2020. Residential solar sales could be affected as companies could not sell door-to-door, manufacturing could be shut down and costs could increase to keep workers and customers safe.

But that’s not what happened. In fact, the construction industry was booming in 2020, so residential solar has been relatively strong. Working conditions outside were also rated relatively safe, so solar projects around the world have gone as planned as well.

The pandemic has also brought about long overdue innovations in solar power. One, in particular, is that residential solar companies have been forced to make more sales with digital tools. SunPower (NASDAQ: SPWR) is one of the leaders of this digital first approach, but You’re here (NASDAQ: TSLA) has also withdrawn all of its door-to-door staff in favor of online sales. Same Sunrun (NASDAQ: RUN) adapts to the new reality with fewer physical points of contact with consumers during the sales process.

Large solar farm in the desert on a sunny day.

Image source: Getty Images.

Politics as usual

It is also not surprising that solar stocks have risen, with presidential candidate Joe Biden taking a clear lead in the polls over President Trump. Biden has clearly put more emphasis on clean energy than Trump, although he is not a supporter of the “Green New Deal”, so the perception is that he will be good for the industry.

Even though Biden supports policies more favorable to the solar industry, it’s not as if the past four years have been bad for solar power. You can see below that solar power generation has grown exponentially for a decade and has grown by almost 300% in the past five years alone.

Graph of solar power generation in the United States

Solar power generation in the United States given by YCharts

Politics can often push traders in and out of industries, so that’s one reason solar stocks are on the rise this year. But politics has generally not been a driver of the fundamental financial health of solar companies, which is ultimately what is helping solar stocks in 2020.

The main reason solar stocks are rising in 2020

Ultimately, the reason solar stocks are up this year is because financial performance is improving. Below is a table of revenue and gross margins for Canadian solar (NASDAQ: CSIQ), JinkoSolar (NYSE: JKS), SolarEdge (NASDAQ: SEDG), and Enphase Energy (NASDAQ: ENPH), four of the largest equipment suppliers in the industry. Not only have we not seen a drop in revenues from the pandemic, but some companies are also seeing their margins increase.

CSIQ Revenue Graph (TTM)

CSIQ Income (TTM) given by YCharts

The financial improvement comes after the industry took a number of steps to focus more on small market segments rather than integrating vertically. For example, SunPower has sold or transferred its development business, inverter manufacturing and its solar energy manufacturing business. The result has been better financial results and better margins in almost every area.

Can the race continue?

Solar stocks may be on the rise this year, but there is no shortage of space to operate. The industry is still expected to grow as the cost of energy from solar panels declines and replaces fossil fuels as the new preferred source of electricity. Manufacturers and installers also have the opportunity to increase their margins after years of breakeven or even loss.

The industry has gone through boom and bust cycles before and that is not excluded, but what is different now is that there are fewer competitors and companies are focusing more on one segment. specific market rather than competition up and down the value chain. As a result, I think solar energy stocks still have a lot of room to grow and may remain the hottest in energy in 2021. This is the future of energy, and the companies that j I mentioned are creating businesses that could impact our energy use for decades to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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