How The Inflation Reduction Act And A Possible Recession Are Impacting Solar Stocks

The Inflation Reduction Act turned a spotlight on solar energy companies by offering incentives for both consumers and the companies themselves. Many solar stocks have skyrocketed since the bill was announced and for good reason.

However, the wide valuation spread between solar companies should give investors pause, although that doesn’t mean the solar energy industry doesn’t offer any attractive stock picks.

Solar Provisions In The Inflation Reduction Act

Solar stock valuations are running at two extremes. The market despises some and adores others. However, a look at their fundamentals reveals why there is such a wide dispersion in solar company valuations.

 

It also demonstrates why it’s no longer advisable to buy all solar stocks carte blanche, as the market did in the early days of publicly traded solar energy companies.

When news of the Inflation Reduction Act and its solar provisions was first reported, investors sent solar stocks through the roof, almost without discrimination. The bill extended the 30% Residential Clean Energy Credit to 2024.

However, that wasn’t the only solar provision in the bill. The Inflation Reduction Act also provides production tax credits that solar panel manufacturers can deduct against their corporate income tax.

First Solar, Inc. (NASDAQ:FSLR) quickly took advantage of this provision by expanding its production facility in Ohio and constructing a new factory in the southeastern U.S.

Some Solar Companies Will Benefit From The IRA More Than Others

Of course, some solar energy companies are likely to benefit more from the Inflation Reduction Act than others. For example, First Solar is the only major solar company that manufactures its panels in the U.S., as most companies make them in China.

As a result, First Solar can be expected to reap some substantial benefits from the bill, although the current economic conditions suggest there is more than just blue skies ahead.

A report from research firm Wood Mackenzie and the Solar Energy Industries Association stated that the inflationary price increases that began last year delayed one-third of utility-scale solar projects set to be completed in late 2021 by at least one quarter. The report also stated that 13% of this year’s installations have been delayed for at least a year.

On the other hand, Wood Mackenzie estimates that extending the investment tax credit for solar will increase utility-scale solar deployment by 86%. All these details suggest a bright future for First Solar — if it can survive the economic downturn.

The company’s healthy balance sheet, with $1.8 billion in cash and equivalents, $7.4 billion in assets, and $1.5 billion in liabilities from the last 12 months, indicates that First Solar has staying power.

First Solar And SunPower

Another factor to consider when looking at solar energy stocks in light of the Inflation Reduction Act is the vast array of business models within the sector, further indicating that not all solar stocks are created equal.

For example, First Solar typically supplies the utility-scale market for solar panels and systems, while SunPower Corporation (NASDAQ:SPWR) focuses on the residential and business market.

Wood Mackenzie expects the residential solar market to also receive a boost from the Inflation Reduction Act, which should be good for SunPower. The firm estimates that the bill will boost residential installations by 20%.

However, in the near term, consumers may be unable to afford solar systems amid the growing possibility of a recession and soaring interest rates, which dramatically inflate the cost of financing those systems.

SunPower also has an attractive balance sheet with $500 million in cash and short-term investments, $1.5 billion in assets, and $1.1 billion in liabilities. However, it hasn’t been profitable in recent years, possibly due in part to the transition that began when it spun off its manufacturing arm into a separate company called Maxeon Solar Technologies Ltd (NASDAQ:MAXN).

A look at SunPower’s and First Solar’s valuations shows that the former looks dramatically undervalued compared to the latter, although SunPower’s profitability struggles suggest why the market loves First Solar and despises SunPower. On the other hand, if SunPower can get its finances sorted out, this could be a buy-the-dip opportunity.

The bottom line on these two stocks is that both are risky, First Solar due to its high valuation and SunPower due to its profitability issues. However, both have the potential to be buy-and-hold options with a long-term timeframe in mind. There are many question marks about SunPower’s transition and whether First Solar can hold onto its rising valuation.

Enphase Energy and Sunrun

Two other solar stocks are also worth considering. Like First Solar and SunPower, Enphase Energy Inc (NASDAQ:ENPH) and Sunrun Inc (NASDAQ:RUN) are polar opposites in terms of their stock price action. However, the differences in their business models are wider.

Sunrun makes its money by installing solar panels on its customers’ homes or businesses and then leasing those panels to the customer for a monthly fee. On the other hand, Enphase Energy makes microinverters used in solar panels and has recently expanded into other green-energy items like electric vehicle chargers and its energy storage device.

Another critical difference is that Enphase is profitable while Sunrun is not, which further bolsters Enphase’s higher valuation. Again, investors must consider whether they think Enphase’s valuation will continue to rise, and again, it could take some time for this scenario to develop, particularly in light of the economic downturn.

As with any investment, investors are advised to do their due diligence on all aspects of a business before investing. In the case of solar energy stocks, understanding the various business models in use is also a key factor.

This post originally appeared at ValueWalk.com.