The solar stocks to own in 2024, according to Goldman Sachs

On the back of what Goldman Sachs expects to be an improving growth backdrop, the firm expects solar sector-specific fundamentals will be more in focus heading into 2024. While Goldman continues to favor utility-scale over residential exposure more broadly, it does see a growing case for a U.S. residential solar recovery moving through 2024. The firm upgraded Sunnova (NOVA) to Buy and Canadian Solar (CSIQ) to Neutral, while downgrading SolarEdge (SEDG) and SunPower (SPWR) to Sell.

THEMES FOR 2024: Discussing the outlook for the Solar space, Goldman Sacks says that it expects an improving growth backdrop and sector specific fundamentals to be more in focus heading into 2024, following a year in which the group significantly underperformed, and the macro was a dominant theme throughout. While it continues to favor utility-scale vs. residential exposure more broadly — given attractive valuation and leverage to potential IRA upside –, the firm does see a growing case for a U.S. residential solar recovery moving through 2024.

Goldman identifies four key investment themes for 2024. First, growth and residential recovery. The firm still prefers utility-scale vs. residential but sees a growth inflection in mid-2024 for U.S. residential and expects less bifurcation between end markets. Second, consistent with residential recovery, Goldman expects U.S. fundamentals to hold up better than non-U.S. and sees domestic exposure as an increasingly investible theme. Third, while the election in late 2024 creates uncertainty, the firm sees IRA tailwinds still to come for most of the supply chain, as well as broader demand environment. Lastly, Goldman notes that the group broadly trades well below market price-to-earnings and EV/EBITDA multiples despite secular growth potential and incentive-laden policy upside that is yet to be sustainably priced in.

STOCKS IN FOCUS: Goldman expects six stocks to be in focus in 2024, namely First Solar (FSLR), Shoals Technology (SHLS), Array Technologies (ARRY), Enphase (ENPH), Sunnova, and SolarEdge.

The firm has a Buy rating on First Solar, with the stock also being part of its Conviction List. Goldman sees the highest quality growth with compounding EPS growth visibility into 2026 and beyond. Also rating the stock a Buy, the firm says Enphase is holding onto technology/price premium as topline recovery to be driven by U.S. residential rebound.

Goldman also notes that Buy-rated Shoals has the highest returns and margins in industry, trading at steep discount despite growth on idiosyncratic risks the firm expects to fade in 2024. Meanwhile, the firm sees Array as the undervalued U.S. utility-scale name with most potential incremental upside to EPS from IRA. Goldman has a Buy rating on the name as well.

Alongside this report, the firm also upgraded Sunnova Energy to Buy from Neutral with a $17 price target. The firm sees a growth inflection in 2024 in the residential solar market, with the better mix to leverage nearer-term upside, as well as a potentially stabilizing lending environment.

Getting more bearish on the name, Goldman downgraded SolarEdge to Sell from Neutral with a $77 price target. The firm’s Sell thesis is based upon its view that the correction in the European solar market is “just beginning,” compared to the U.S. market which “seems to be much closer to the bottom.” The firm notes 1% upside to its current 12-month price target versus about 55% average upside across its solar average.

OTHER RATING CHANGES: Goldman Sachs also downgraded SunPower to Sell from Neutral with a price target of $4, down from $5. Average selling price declines, driven by increased competition from Maxeon Solar (MAXN), will pressure margins and set up SunPower for “a challenging 2024,” the firm tells investors.

Additionally, Goldman Sachs upgraded Canadian Solar to Neutral from Sell with a $25 price target. The firm’s previous Sell thesis was predicated upon margin risks, but with the stock having pulled back it now sees a more balanced risk-reward profile.

UPSIDE POTENTIAL: Goldman sees a median of 55% upside potential to its Solar Coverage and 91% average upside potential to Buy-rated names, with its end market preference still focused on utility-scale, while its geographical positioning also calls for more U.S. vs. non-U.S. exposure. Among installers and inverters, the firm is Buy rated on Sunrun (RUN) and Sunnova, with SunPower its Sell rated idea and Enphase its top equipment idea levered to residential vs. its Sell call in SolarEdge. On the utility-scale solar ideas, Goldman favors U.S.-levered supply chain players First Solar, Shoals and Array.