How to invest in solar energy stocks

What you need to know about the solar energy industry

Global energy demand is growing, but so is the reluctance to invest in energy sources that damage the environment and contribute to climate change. This is why investment has grown in areas of sustainable energy, such as solar, wind, hydroelectricity and tidal. The solar energy industry has grown at a rapid rate since 2010, increasing by approximately 150% by 2018 alone.

The global solar power market size was estimated to be worth $67.83 billion in 2021 and $234.86 billion in 2022. It is expected to reach $373.84 billion by 2029, growing at compound annual growth rate of 6.9% during 2022 to 2029.

Overall, global renewable power capacity is expected to grow by 2,400 gigawatts (GW) over the 2022-2027 period, a figure equivalent to China's entire power capacity, according to the International Energy Agency's most recent annual report.

According to the US Energy Information Administration, non-hydro renewable energies – mainly wind and solar – made up 10% of US electricity sources in 2018. The solar sector works in what is known as a feast and famine cycle. The fluctuations in growth stem from the capacity of companies to supply materials, as well as the demand from consumers – both of which can change from year to year.²

When there are large scale projects and investment in the industry, companies benefit and revenues go up. But when there isn’t enough demand to keep production steady, or an abundance of cheap supply floods the market, it prevents companies being able to grow. The industry has seen its fair share of ups and downs, especially after the Trump administration slapped tariffs of 30% on solar panels imported to the US. This move was part of a larger effort to promote US manufacturers over competitors in China, Malaysia and elsewhere. Some companies and products were exempt from these tariffs, which led to increased share prices for some US-based companies.

President Joe Biden's $369 billion Inflation Reduction Act, meanwhile, signed in 2022, has been hailed as the largest climate investment in America's history. This takes the form of tax credits payable to renewable companies to incentivise investment in the sector and is expected to provide a major boost to the industry.

What are the different types of solar stock investments?

There are three main categories of companies that investors focus on in the solar industry. These are:

1. Solar panel manufacturers. The companies that produce components of each panel including inverters, batteries and software
2. Solar panel installers. The companies that sell solar panels and components directly to consumers
3. Solar financing companies. The companies that fund solar projects for companies, or provide consumers with loans to pay for solar installation

How to take a position on solar stocks

There are two ways to take a position on solar stocks depending on your overall strategy and personal preferences. You can:

1. Invest in solar company shares by opening a share dealing account
2. Speculate on the prices of solar company shares by opening a trading account

If you don’t feel ready to trade on live markets, you can build your solar trading strategy in a risk-free environment first by creating an IG demo account. Alternatively, you can learn more about financial markets by exploring IG Academy’s range of online courses.

How to invest in solar stocks

When you invest in a solar stock, you’d do so by buying shares in a company outright in the hope that they increase in price and you could then sell them at a later date for a profit. When you buy shares, you would gain shareholder rights such as dividend payments and voting rights.

Normally, you would invest if you have a much longer-term view of the market and want to profit from annual dividends as well as changes in the share price.

Find out more about IG’s share dealing service

How to trade solar stocks

Alternatively, you could speculate on the price of solar stocks by using derivative products, such as spread bets or CFDs. When you trade solar stocks, you’d never take ownership of the underlying shares – although this means you wouldn’t gain any shareholder rights, it does mean that you can take advantage of price movements in either direction. Being able to go short as well as long gives you a much wider range of opportunities than would be available with traditional investing.

When you spread bet, you’re placing a bet on which direction the market price of a solar stock will head. The profit or loss you make is dependent on how far the market moves in your chosen direction. Spread bets are completely free from stamp duty and capital gains tax.

Learn more about spread betting

If you trade CFDs instead, you would be entering into an agreement to exchange the price of a solar asset from when your position is opened to when it is closed. CFDs are particularly useful for hedging a share portfolio, because you can offset any losses against profits for tax purposes.⁴

Learn more about CFD trading

Top solar energy stocks to watch

As there are so many different solar energy stocks you can trade or invest in, and so many different kinds of solar companies, we’ve taken a look at some of the top solar stocks by market capitalisation. These are:

1. First Solar
2. Iberdrola
3. Nextracker Inc
4. SMA Solar Technology
5. Enphase Energy

These companies have gained market interest over the course of their lifespan, not just for positive market movements but for negative periods too. When traders open a position to sell a company’s shares in a period of economic downturn and declining industry interest, it is known as shorting a stock.

These stock selections have been made on the basis of their market capitalisation, past performance and growth prospects. Only invest money you can afford to lose.

First Solar - $17 billion

Formed in 1999, US-based First Solar makes solar photovoltaic panels and systems. It is the biggest manufacturer of these products in the Western hemisphere and invests heavily in R&D to ensure it remains innovative.

Shares in First Solar have fallen by 16% over the past 12 months to $151. Third quarter net sales reported in October fell by $10 million to $801 million, due to a decrease in the number of modules sold. However, management says the company is making “steady progress” and maintained its earnings guidance at the results, increasing the mid-point of its EPS forecasts from $7.50 to $7.60. First Solar says it has a year-to-date net bookings of 27.8 gigawatts and an expected sales backlog of 81.8 gigawatts.

“Since our last earnings call, we have made steady progress, establishing the foundations for our long-term growth journey, including investments in manufacturing and the infrastructure needed to rapidly evolve and scale our technology,” said Mark Widmar, CEO of First Solar. “Our growth is underpinned by our points of differentiation and solid market fundamentals, including continued strong demand for our products, proven manufacturing excellence, a uniquely advantaged technology platform, and, crucially, a balanced business model focused on delivering value to our customers and our shareholders.”

The shares trade on an expensive price earnings ratio of 33 but may be worth buying on weakness. Analysts at broker Jefferies Financial initiated coverage of the shares in December with a buy recommendation and a price target of $211.

Iberdrola – €74 billion

Spanish clean energy provider Iberdrola is not a pure play solar power company. The utility firm formed in 1870 also operates in the gas, nuclear and wind energy sectors. However, it has been busy beefing up its solar capacity in the European market, especially in the UK and Spain. In 2022, it picked up 17 solar projects in the UK through its subsidiary Scottish Power, investing £500 million.

It also has 31 GW of solar projects under development in Spain, US, Mexico, UK, Portugal and Italy. From 2020-2025 it plans to increase its PV capacity to 14 GW installed by 2025. The company also operates in Spain, the US and Brazil.

It recently cancelled its $8 billion deal to buy US company PNM Resources. The acquisition would have made its Avangrid subsidiary into one of the largest US utilities firms. The deal had struggled to gain traction following the rejection of it by one US regulator in 2021 and various legal battles had ensued. On the bright side, changing tack will mean Iberdrola’s debts do not balloon to what could have been an estimated $55 billion, as analysts at Goldman Sachs have pointed out. Analysts at the investment bank suggested that the rise in interest rates had made the deal less attractive.

In the first nine months of the year, Iberdrola also grew net profits by 17.2% to €3.6 billion. The company has also increased its solar capacity by 55%, with a number of projects underway in Spain. Iberdrola has invested €11 billion in its assets this year, with the aim of establishing a networks asset base of €40 billion euros and 41,250 MW of installed renewables capacity.

The shares are up 5% this year to €11 and trade on a price earnings ratio of 16. They also yield 4.5%. Analysts at broker UBS currently have a buy recommendation on the stock.

Nextracker Inc – $6.3 billion

Nextracker floated on Nasdaq last spring. The company is a slightly different proposition from other solar firms included here as it provides the software and integrated solar tracker technology for major solar generation projects. Its products enable customers’ solar panels to follow the sun’s movement across the sky and optimise performance, including coping with the demands of uneven terrain and extreme weather patterns.

The shares have performed well so far since the flotation, Meanwhile, second quarter revenues rose 23% to $573 million, while adjusted earnings before tax, interest, depreciation and amortisation (EBITDA) were up 164$ to $110 million.

The company says it has a strong order backlog and has raised its earnings guidance for the full year to revenues of $2.3 billion to $2.4 billion (vs. previous $2.2 billion to $2.4 billion) and GAAP net income of $237 million to $266 million (vs. previous $176 million to $205 million).

“Nextracker’s Q2 results reflect strong worldwide execution, and we are pleased with our record revenue, profits, and backlog,” said Dan Shugar, Founder and CEO of Nextracker. “We closed our third consecutive quarter of growth year-over-year, as a public company, and it was our sixth consecutive quarter of margin expansion on a sequential basis."

SMA Solar Technology - €1.7 billion

German company SMA Solar Technology develops, produces and sells photovoltaic inverters and monitoring systems, as well as charging systems for electric vehicles. The company has longevity, having been around since 1981. Recent third quarter results were upbeat, however, with sales up 85% to €1.3 billion (€724 million in the third quarter 2022) and net income €180 million (€11 million in the same period last year - €55 million at the full year 2022).

SMA reported an order backlog of €2.0 billion (September 30, 2022: €1.7 billion) and an increase in free cash flow of €78.6 million, increasing its net cash reserves to €302.8 million. What’s more, the company also confirmed its earnings guidance for 2023, which was increased in October to sales of between €1.8 billion and €1.9 billion and EBITDA of between €285 million and €325 million.

Yet the shares have slumped by 40% this year to €48 over concerns that orders for its products may be slowing. After a strong year for solar installations in Germany in 2023, there are fears that the budget crisis could mean that sales fall.

Nevertheless, the bad news may now be priced into the shares. SMA is well financed but lowly valued on a price earnings ratio of 7 and could be worth watching.

Enphase Energy - $14.5 billion

Shares in the US provider of home solar solutions have fallen by a painful 54% this year to $103. Enphase Energy is one of the biggest solar players on the US stock market – and globally. Its platforms enable customers to manage their home energy generation, storage and control needs in one system.

Earlier this year, investors were rattled by the company’s downbeat earnings guidance, suggesting that the high interest rate environment may mean sales slowing. Indeed, third quarter revenues came in at $551.1 million – compared to the $711.1 million generated in the second quarter. Blaming “macroeconomic conditions,” US revenues for the quarter fell by around 16%, compared to the second quarter, while revenues in Europe fell by 34%. This was due to high inventory at our distribution partners and a fall in demand. The stock still sells on a relatively expensive price earnings ratio of 27 but could be worth watching.

Solar shares can be volatile. Past performance is not a guide to future performance.

Footnotes

_{¹BCC Research, 2019
²EIA, 2019
³National Solar Jobs Census, 2018
⁴Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK}