The clean tech stocks to own in 2024, according to Morgan Stanley

After the substantial selloff in clean tech stocks in 2023, Morgan Stanley expects a few key themes to dominate the clean tech sector in 2024, including interest rates, deflation of core clean energy technologies, election cycle effects, and profitable and low-risk growth. Last week, the firm upgraded First Solar (FSLR) to Overweight as it sees the company offering one of the strongest risk-adjusted earnings profiles within the firm’s U.S. clean tech coverage with its sold-out position through 2026.

KEY THEMES: Morgan Stanley has identified four key themes that it believes will affect valuations of clean tech stocks into 2024. First, interest rates. If rates fall, as predicted by many, the firm believes clean energy valuations could see a meaningful improvement. Morgan Stanley also argues that deflation of core clean energy technologies could help offset elevated interest rates, but potentially more modestly than expected. Slowing EV demand plus falling lithium carbonate prices should meaningfully improve battery storage economics.

Additionally, the election cycle could have effects on clean energy, but Morgan Stanley doesn’t see an IRA repeal as likely. Nonetheless, anti-IRA rhetoric on the campaign trail could add uncertainty and affect clean tech valuations. Lastly, earnings consistency and profitable growth will play a roll into 2024. The firm notes that somewhat extreme cyclicality in clean energy has driven considerable downside to earnings estimates and valuations across the industry. Companies with strong earnings visibility, profitable businesses, strong balance sheets with limited capital needs, and limited downside to consensus estimates will outperform until rates, macro uncertainty and recession fears subside, says Morgan Stanley.

ATTRACTIVE INDUSTRY VIEW: Morgan Stanley maintains its Attractive industry view of clean tech, as the firm expects the IRA legislation and attractive renewables economics to drive 10-plus years of robust renewables growth. Morgan Stanley sees a number of high-quality clean energy companies that have been “thrown out with the bath water” and sees an opportunity for outperformance in 2024, but recommends investors stay nimble and focus on companies that provide strong earnings visibility, consistent execution, healthy balance sheets and cash generation.

BUY FIRST SOLAR: Morgan Stanley upgraded First Solar to Overweight and raised its price target on the shares to $237 from $214. After the 20% selloff in the past three months, the firm sees an attractive risk-reward profile for the stock. Further, Morgan Stanley believes First Solar offers one of the strongest risk-adjusted earnings profiles within its U.S. clean tech coverage with its sold-out position through 2026, which when combined with its cost hedging, should result in 1,020 bps of relatively low-risk margin expansion through 2026. Based on its bottom-up solar panel cost analysis, the firm believes First Solar’s pricing will remain relatively resilient in the near-to-medium term.

HIGH-CONVICTION STOCKS: Morgan Stanley says that the firm’s high-conviction Overweight-rated stocks in U.S. Clean Energy include NextEra (NEE), AES (AES), Bloom Energy (BE), First Solar, and Altus Power (AMPS). On the flip side, highest-conviction Underweight-rated stocks in U.S. Clean Energy include Plug Power (PLUG), SunPower (SPWR).

PRICE ACTION: In Monday morning trading, shares of First Solar are fractionally up at $145.46.