A good idea and $4.5 won’t get you a gallon of gas in the US these days. The ability to execute is what separates budding entrepreneurs from entrepreneurs. And of course, a willingness to spend every iota of your time and energy trying to build a business in the face of a dismal failure rate. Likewise, just because a technology develops like crazy doesn’t mean you can reap the rewards of investing in it. Solar investors have learned this the hard way over the years.
As we plan to rid our portfolio of the remaining two ETFs we hold, we will lose our exposure to the solar industry. It may be time to assess why we want sun exposure in the first place. To do this, we want to look at the type of growth expected in the future. Since we already own the largest renewable energy company in the world, we’ll need a pretty compelling reason to replace our solar exposure. Turns out, there are plenty of good reasons to want to be out in the sun right now.
According to Iinternational Eenergy Aagency (OUCH), 95% of all increases in electricity capacity in the world will come from renewable energies. Of these, 60% will be solar and 29% wind. Below you can see the expected capacity expansion for both on the next five years solar expecting much stronger growth than wind.
Although these estimates span the next four years, wind and solar growth is expected to continue for decades. The chart below was taken from a SolarEdge investor deck and shows that solar growth will account for 38% of all power generation capacity by 2050.
Solar could be a good place to store some money from our ETF sale, but first we need to find a good solar stock. Easier said than done.
A good solar stock
Before we go any further, let’s define what a good solar stock might look like. High on the list would be international diversification. This is because each country has its own government subsidies and tax benefits which can suddenly change and impact industry players. The more countries you operate in, the less regulatory risk you incur.
Although China currently dominates the industry with 36% of the solar capacity installed in the world, we do not wish to hold Chinese shares. We’ve already talked about the risks for foreign investors venturing into China, and the inability to easily research Chinese companies means we’ll give them a pass.
An ideal solar stock would provide holistic solutions that extend beyond a single hardware product such as inverters or panels and focus not only on niche applications such as residential rooftops, but also on applications commercial. Ideally, we want to invest in a market leader. With these criteria in mind, let’s take a look at the top ten solar stocks today.
Top 10 Solar Stocks
It is safe to assume that the main and only solar ETF – the Invesco Solar ETF (TANNING) – would contain the major solar stocks we should be looking at. Here are the top ten constituents so far:
|SolarEdge Technologies Inc (SEDG)||we||11.67%|
|Enphase Energy Inc (ENPH)||we||9.05%|
|Xinyi Solar Holdings Ltd (0968.HK)||China||7.11%|
|Premier Solaire Inc (FSLR)||we||6.89%|
|Sunrun Inc (CLASSES)||we||5.12%|
|Daqo New Energy Corp ADR (DQ)||China||4.85%|
|Atlantica Sustainable Infrastructure PLC (AY)||UK||3.32%|
|Jinko Solar Holding Co Ltd ADR (JKS)||China||3.31%|
|Hannon Armstrong Sustainable Infrastructure Capital Inc (HASI)||we||2.91%|
|Encavis S.A. (ECV.DE)||Germany||2.80%|
Chinese companies are off our radar, which leaves seven companies. Starting from the bottom, Encavis acquires and operates onshore solar and wind farms in Europe. Managing a portfolio of renewable energy projects is a business model that closely resembles the world’s largest renewable energy company which is currently our largest technology holding company. The same can be said for Atlantica, a sustainable infrastructure company that operates out of the UK. And then there is Hannon, a “climate solutions” REITs which does not have the type of sun exposure we are looking for. We are then left with four candidates to evaluate. Here is a brief description of what each is doing with their current market capitalization.
- sunrun ($5.4 billion) – Operates the largest fleet of residential solar power systems in the United States. More than 40% of their cumulative systems deployed are in California.
- First Solar ($7.6 billion) – The only surviving domestic solar panel maker in the United States, where multiple markets accounted for 84% of 2021 net sales. Must compete with China which dominates solar panel manufacturing.
- Phase ($21.2 billion) – Provides residential and commercial solar and storage solutions. 80% of its revenues are generated in the American market.
- SolarEdge ($15.5 billion) – Supplier of power optimizers, solar inverters and monitoring systems for photovoltaic panels. In 2021, 45.4% of revenues were generated from Europe, 40.0% from the United States and 14.6% from the Rest of the World.
Based on the criteria we mentioned earlier, Sunrun’s US residential exposure with a heavy concentration in California eliminates them from consideration. With $6 billion in debt on their books, they are only one regulatory change away from breaching a covenant.
As for First Solar, they build solar panels and sell them mainly in the United States. A recent CEO letter talks about how China is over-subsidized and First Solar has to compete unfairly with them. Anyway, we’re not looking to invest in David when Goliath is about 71% of the world’s total photovoltaic manufacturing capacity.
Now we are left with the two largest companies on the list – Enphase and SolarEdge – both of which focus on selling components for solar systems called inverters. In an upcoming article, we’ll take a look at how these two companies compare and find out if either can find a place in our own portfolio of disruptive tech stocks.
Of all the types of renewable energy, solar power is expected to experience the fastest growth over the next five years. It is also expected to be the dominant form of electricity generation by 2050 at 38%, followed by wind power at 20%. Given that energy makes the world go round, it makes sense that we have exposure to both wind and solar in our portfolio. After reviewing the top ten solar stocks, we are left with just two – SolarEdge and Enphase. The next step is to examine these companies in detail to learn more about what drives them.
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