Over the years we have seen solar energy companies come and go, many of them folding under the pressure of trying to turn their revenues into profits. However, we are beginning to see the wheat from the chaff, with several attractive solar companies turning profitable. In this article, we compared two solar stocks. First Solar (NASDAQ: FSLR) and Sun Power (NASDAQ: SPWR) seem to have resistance. However, the market has treated these two as complete opposites, with First Solar up about 14% over the past year and SunPower down 48.5% over the same period. At first glance, it’s unclear why, but a deeper dive reveals why the FSLR is better.
Solar Energy and the Inflation Reduction Act
It’s no secret that solar energy companies are usually faced with exciting opportunities. In 2022, IBISWorld estimated that the US solar energy market was worth $16.9 billion and would grow by 27%. He also estimated that the U.S. solar power market has grown an average of 21.7% per year since 2017. A White House statement recently claimed that the U.S. is on track to triple its capacity. national solar manufacturing by 2024.
The widely publicized Cut Inflation Act has had other benefits for the US solar market. The bill extended the 30% residential clean energy credit, better known as the solar investment tax credit, until 2024. The incentive had previously been set to quit. from 26% in 2022 to 22% next year before disappearing entirely in 2024.
The Cut Inflation Act also gave solar panel makers production tax credits that they can deduct from their corporate income tax, a benefit First Solar is already taking advantage of by ramping up production. in Ohio and building a new plant in the southeastern United States.
Of course, not all solar energy companies are created equal, not least because of the different business models that exist. For example, some solar companies make money by renting out the solar panels they install on their customers’ buildings, while others, like First Solar and SunPower, make money by selling panels and solar systems.
The main difference between First Solar and SunPower is that they address two parallel but different markets. First Solar’s panels and systems are designed only for large-scale or megawatt-sized power plants, while SunPower caters to the residential solar market.
Additionally, SunPower ceased manufacturing its own solar panels in 2022. It split into two separate companies, leaving its manufacturing to Maxeon Solar Technologies (NASDAQ: MAXN), while First Solar continues to both design and manufacture its solar panels and systems.
First Solar (FSLR)
First Solar is the largest solar panel maker in the United States, making it a key beneficiary of the Cut Inflation Act. First Solar is undeniably expensive, with a P/E ratio of 69.5x and a P/S ratio of ~5.5x, compared to the average P/S of renewable energy stocks of ~1.9x. However, a bullish view seems appropriate for First Solar with this caveat – the high valuation makes it a risky choice, requiring a long-term buy and hold strategy.
First Solar is unique because it is the only one of the largest solar panel manufacturers to manufacture its panels in the United States rather than China. As noted above, it also differs from SunPower in that it caters to the utility-scale solar market rather than the residential one.
Unfortunately, utility-scale solar projects have seen the highest inflationary price increases compared to residential projects. Due to these price increases, a third of large-scale solar projects that were due to be completed by the end of 2021 have been delayed by at least a quarter, according to a report by research firms. Mackenzie Wood and SEIA.
The report also states that 13% of installations this year were delayed for a year or more. On the other hand, Wood Mackenzie also expects the extension of the solar energy investment tax credit to increase the deployment of large-scale solar energy by 86%.
It should be noted that First Solar raised its 2022 net sales guidance in its second quarter earnings release, but significantly reduced its profitability and related metrics. The company has a healthy balance sheet with $7.4 billion in assets, $1.8 billion in cash and cash equivalents and $1.5 billion in liabilities for the last 12 months.
What is the target price for FSLR shares?
First Solar has a moderate buy consensus rating based on 13 buy, four take, and one sell rating over the past three months. At $145.12, the average price target for First Solar implies 14.1% upside potential.
Sun Power (SPWR)
Although aimed at the residential end rather than the utility scale of the solar market, SunPower enjoys many of the same advantages as First Solar. However, it began to struggle to turn a profit during the pandemic, and insiders sold shares, suggesting they questioned SunPower’s near future. Thus, a neutral view seems appropriate for SunPower despite its healthy balance sheet and low valuation.
While First Solar’s revenue growth has been volatile, SunPower’s has been stable. However, despite this steady revenue growth, SunPower failed to make a profit in the last fiscal year, losing money in the year ending January 2022. It has been profitable for the past few years. years ending in January 2021 and December 2019.
In terms of secular trends, SunPower should also benefit from the extension of the solar investment tax credit, which is expected to boost residential installations by 20%. However, the possibility of a recession and soaring interest rates suggest that homeowners may postpone installing solar panels due to the high initial cost.
On the positive side, SunPower has an attractive balance sheet with $1.54 billion in assets, $500 million in cash and short-term investments, and $1.1 billion in liabilities. Its valuation at 1.9 times sales is attractive, but the stock is risky given the company’s financial difficulties. However, SunPower is worth watching to see if it can turn things around. The separation of its manufacturing branch could create temporary problems in its fundamentals.
What is the price target for SPWR shares?
SunPower has a consensus Hold rating based on four buy, six hold and four sell ratings given over the past three months. At $23.31, the average price target for SunPower implies 35.9% upside potential.
Conclusion: Both are risky, but FSLR can be better
A deep dive into the fundamentals of SunPower and First Solar shows why the market hates SunPower so much while loving First Solar. A key difference is that insiders bought shares of First Solar while insiders of SunPower unloaded shares in the last quarter. Additionally, First Solar clung to its profitability during the pandemic while SunPower struggled.
On the one hand, the big difference in valuation makes SunPower more attractive than First Solar, but on the other hand, First Solar seems more stable from a profitability point of view. Unfortunately, First Solar’s high valuation makes it risky and could mean it will take some time for investors to see a return on their investment, but the many question marks for SunPower around its manufacturing division call for an approach. wait-and-see.