Stock Analysis & Ideas

Here’s Why the Time Is Right for These Clean Energy Stocks

Story Highlights

The proposed climate bill promises to inject billions of dollars into the clean energy sector and serves as a clear catalyst for clean and alternative energy stocks. The below-mentioned stocks are in an advantageous position to register abnormal returns longer term.

Let’s take a look at clean energy stocks First Solar and Enphase Energy, as well as the alternative energy stock Plug Power, that are slated for an upswing thanks to a proposed Senate energy and climate-spending package worth $369 billion.

Last week, solar stocks and green energy stocks saw euphoric gains after U.S. Democratic Senator Joe Manchin and Senate Democratic leader Chuck Schumer struck a deal and proposed the aforementioned package.

The newly proposed Inflation Reduction Act (IRA) will raise $739 billion, out of which $369 billion will be exclusively allocated to climate and energy programs. The bill is also aimed at bringing down healthcare costs as well as reducing inflation and the federal deficit through a 15% corporate minimum tax.

With an aim to make the U.S. more energy independent and boost domestic production of green energy, the climate package comprises subsidies and tax incentives that will direct billions of dollars to wind, solar, and battery developments while also supporting oil and gas and coal production.

The bill will enable investments in technologies needed for cleaner production and use of fuel types, including hydrogen, nuclear, renewables, and fossil fuels, as well as provide tax credits for buying electric and hydrogen vehicles.

Meanwhile, higher costs and valuations have hammered clean energy stocks in the past couple of months, pulling them from their peaks seen at the beginning of FY2021.

With the catalyzing climate bill, solar and green energy stocks will be one of the biggest beneficiaries, as it could significantly uplift their profits going forward.

First Solar (FSLR)

Based in the U.S., First Solar focuses on developing, engineering, constructing, and operating grid-connected large-scale PV power plants. It manufactures solar panels and PV modules and is known for its advanced thin-film modules for its solar panels, which provide a high-performance, lower-carbon alternative to conventional crystalline silicon PV panels.

First Solar shares leaped a whopping 30% in less than a week following the dual good news of upbeat second-quarter results as well as the proposed climate bill acting as the immediate catalyst.

The company reported earnings of $0.52 per share, which came in more than tenfold higher than the analyst estimates of $0.04. The earnings gain was driven by higher module sales volume; a gain on the sale of the Japan project development platform; record bookings and backlog,

Furthermore, the company also increased its FY2022 revenue outlook from the earlier $2.4 billion to $2.6 billion, to $2.55 billion-$2.8 billion, much higher than the consensus expectations of $2.43 billion.

Notably, the company posted a record backlog of more than 44 GWs, ensuring future deliveries till 2026. On top of that, new bookings worth 10.4 GWs took the total bookings to 27.1 GWs year-to-date.

During the earnings call last week, CEO Mark Widmar stated that First Solar will potentially expand its manufacturing capacity in the U.S. if the proposed bill gets passed and becomes a law.

What’s even more encouraging is that First Solar stock saw multiple upgrades by well-known street analysts as well as upward revisions in price targets.

Oppenheimer analyst Colin Rusch upgraded First Solar to Buy from Hold with a price target of $116 (16.6% upside potential).

Rusch estimates that FSLR will achieve earnings accretion of between $8 and $10 annually as a result of the tax credits from domestic production with the implementation of the new bill.

Meanwhile, the rest of the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on five Buys, seven Holds and one Sell. The average First Solar price target of $97.04 implies 2.5% downside potential to current levels.

Plug Power, Inc. (PLUG)

Based in New York, U.S., Plug Power is an electrical equipment manufacturing company engaged in the development of hydrogen fuel cell systems that replace conventional batteries in equipment and vehicles powered by electricity.

Shares of Plug also galloped about 25% on the climate bill news to cross $20 price levels. Despite the sharp share price recovery, the shares are still trading much lower than their January 2021 peaks of $65.

With the introduction of the tax subsidies and incentives, Plug is now bound for meaningful growth and profitability, with expansion into new markets, new geographies, and into the green hydrogen space.

Investors will get more clarity on the stock’s future prospects and the detailed implications of the proposed bill at its earnings announcement next week on August 9.

According to J.P. Morgan analyst Bill Peterson, has a first-mover advantage to “scale up PEM-based technology production very rapidly and deploy a network of hydrogen production and fueling systems.”

He further believes that “the overall market opportunity could easily exceed $200B, so this company may be launching into open-ended growth, but—for now—it is focused on 50%+ CAGR revenue growth to ~$3B and over $600M of EBITDA by 2025; the partnerships with SK Group, Renault and other firms make this attainable.”

The analyst assigns a Buy rating with a price target of $28 (31.83% upside potential).

Overall, the stock has a Strong Buy consensus rating based on 11 Buys and three Holds. The average Plug Power price target of $34.23 implies a 61.16% upside potential from current levels. Shares of PLUG have lost 20% over the past year.

Enphase Energy (ENPH)

Based in California, U.S., Enphase Energy is an energy technology company that manufactures and sells software-driven home solar energy solutions, including micro-inverters, energy generation monitoring software, and battery energy storage products.

Shares of Enphase Energy, with a current market capitalization of $36 billion, have hugely outperformed the benchmark indices over the past year, gaining more than 50%. In fact, shares have doubled over the past six months, recovering from their lows at the beginning of the year.

They are trading at their all-time highs already. The question is, is there room for further upside? Let’s take a deeper look at the company.

Driven by robust demand and strong pricing power for IQ8 microinverter products in the US, the company reported stronger-than-expected Q2 results.

Adjusted earnings of $1.07 per share massively beat analysts’ expectations of $0.85 per share. Revenues of $530.2 million jumped 68% and also exceeded the consensus estimate of $507 million.

The company continues to gain market share and remains confident in achieving margin expansion through IQ8 and next-generation battery products.

Like First Solar, Enphase Energy also received several upward target price revisions over the last week triggered by the double good news.

Impressed by the upbeat Q2 results and strong guidance, on July 28, Credit Suisse analyst Micheep Mandloi upgraded Enphase Energy to Buy from Hold and also hiked the price target to $281 (from $174).

Mandloi’s upgrade was driven by robust results on the back of superior IQ8 pricing and margins as well as operating leverage that offset the negative impact of continuing supply chain challenges.

Consensus among analysts is a Strong Buy based on 12 Buys and two Holds. The average Enphase Energy analyst price target of $261.93 implies 6.75% downside potential to current levels.

Concluding Thoughts

The “Go Green” trend is here to stay. As fortunes reverse with the renewed prospect of government funds, it’s time for investors who have made their initial investments in green stocks to enjoy the upward bandwagon the shares have jumped on.

Based on the assumption that the climate bill gets passed, last week’s upswing in shares will mark just the beginning of an impressive upward trajectory for energy stocks for years to come.

Given the bright future awaiting clean energy stocks both in the U.S. as well as across the globe, we believe the current levels offer great entry point to capture the higher returns in the long run.

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