An increasing pressure, from both social and political directions, has combined to boost clean and renewable energy providers, including residential scale solar installation providers. Residential solar offers several benefits to the customer, including grid-independent home power and an ability to sell electricity back to the utility provider.
Yet, the residential solar business has faced strong headwinds in the last year or more, due to high interest rates increasing the cost of financing the installations. But with the Fed looking more likely to start paring back rates in the spring, some analysts are seeing a brighter near-term for the residential solar sector.
Covering this business from Mizuho, analyst Maheep Mandloi looks at the industry’s prospects. “In 2024, we expect the industry to be dominated by: interest rate increases slowing (or reversing), the US Treasury clarifying the next phase of IRA rules, channel inventory absorption in the first half, and growing demand due to declining equipment costs,” Mandloi explained. “Residential (Resi) solar demand is expected to be under pressure until interest rates peak. However, we also see some room for increased value creation as energy storage adoption increases renewable system $ ticket sizes, and equipment costs fall against a backdrop of higher electricity costs.”
Building on his comments, Mandloi goes on to monitor the residential solar industry, and picks out two solar stocks that feature strong upside potential – well over 90%, according to the Mizuho forecast. Here are the details, pulled from the TipRanks databanks, along with Mandloi’s comments.
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Sunnova Energy International (NOVA)
The first residential solar company we’ll look at is Sunnova, a leader in this sector’s US market. Sunnova has its hands in every aspect of this niche, from setting up the rooftop solar panels to plugging into the home power system to installing the necessary power storage batteries. The company provides both installation and support services, and makes repairs, system modifications, and spare and replacement parts available to meet customers’ needs on demand. Sunnova can even provide financing options, to smooth the way for customer purchases.
Sunnova was founded in 2012, and over the past decade it has expanded its operations into 47 US states and territories, from Arizona to Wisconsin. The company understands that every home is different, necessitating a custom approach to residential solar installations – but also helping to ensure a customer-centered product delivery. From its Texas headquarters, Sunnova oversees the operations of its 1,900+ dealers, sub-dealers, and builders, who serve the firm’s 386,000+strong customer base.
That customer base is growing, and at a solid clip. Sunnova added over 39,000 new customers in 2Q23, and followed that up with over 37,000 more in 3Q23. As of September 30 this year, Sunnova had 386,200 customers on the books, a figure that was up significantly from the 279,400 reported at the end of 2022. Looking ahead, the company is expecting to bring in between 185,000 and 195,000 new customers during 2024.
That said, when we turn to the company’s recent earnings report, for 3Q23, we find that Sunnova missed the forecasts in its last quarter. Revenue came in at $198.4 million, up $49 million, or 33%, year-over-year – but still $3.6 million behind the estimates. At the bottom line, Sunnova’s quarterly loss came to 53 cents per share by GAAP measures; this missed the forecast by 16 cents, and was a deeper loss than the 56 cents reported in the year-ago quarter.
Despite the recent earnings miss, analyst Mandloi still takes an upbeat view of the stock. He particularly points out Sunnova’s strength in financing, as well as governmental support from last year’s Inflation Reduction Act (the IRA). He writes, “Sunnova is among the top residential solar financing companies in the US and has been growing above the market growth rate since its IPO in 2019. We rate the shares Buy owing to Sunnova’s ability to capture market share in an adverse environment as the industry switches from loans to leases/PPAs, its growing IRRs and value creation due to electric bill inflation coupled with a decline in equipment prices, its access to lower-cost capital from DOE loan guarantees, upside potential from tax credit adders under the IRA, and an attractive valuation.”
Mandloi’s Buy rating is backed by a $20 price target, suggesting the shares will gain a robust 96% in the coming year. (To watch Mandloi’s track record, click here.)
There are no fewer than 20 recent analyst reviews on Sunnova’s stock, reflecting the buzz that renewable energy can generate along with power. These reviews break down to 15 Buys and 5 Holds, for a Strong Buy consensus rating. The shares are selling for $10.22 and their $18.92 average price target implies an 85% one-year upside potential. (See Sunnova’s stock forecast.)
Sunrun, Inc. (RUN)
The second stock on our list is Sunrun, another leading company in the US residential solar power market. Sunrun bills itself as a full-service provider, with a focus on made-to-order customer solar installations for single-family homes. This niche once meant ‘rooftop solar panels,’ but the technology and aesthetics are far more advanced than the simple panels former President Jimmy Carter put on top of the White House in the 70s. Sunrun designs, builds, and installs high-end, package solar deals, tailored to each customers’ home.
Included in the package deals are, of course, rooftop photovoltaic panels, as well as grid connections, ‘smart’ control systems, and high-tech power storage batteries. The company will also offer financing, and multiple payment plan options. Customers can choose options to pay in advance, in full, or to set up a payment plan, based on a long-term amortization with a lease on equipment and monthly payments.
Financing flexibility has helped push Sunrun into the top tier of residential solar. The company brought in 33,806 new customers in 3Q23, of whom 29,303 were paying subscriber additions. The company’s net subscriber value was $11,030 through the third quarter.
Sunrun’s revenues hit a recent peak in the second half of last year, and have edged slightly down since then. The current business headwinds, including high interest rates, caused a slowdown in the business. The prospect that interest rates could follow inflation down in the first quarter of next year is bullish for a company dependent on customer financing.
And this brings us to Mandloi’s view of RUN, which is bullish – in part due to the company already using a lease-based long-term payment mode that he sees as growing more important going forward. Mandloi sums up his view of Sunrun in a recent note, writing, “Sunrun is the largest third-party owner and developer of residential solar systems in the US. We are Buy rated owing to Sunrun’s leadership in the US residential market, where it is gaining market share in an adverse environment as the industry switches from loans to leases/PPAs, its improved value creation due to electric bill inflation coupled with a decline in equipment prices, upside from tax credit adders under the IRA, and an attractive valuation despite higher interest rates.”
The aforementioned Buy rating is accompanied by Mandloi’s $23 price target, which implies a strong 103% upside potential for the next 12 months.
The rest of the Street is mostly on board, too. The Moderate Buy consensus rating on the stock is based on 20 ratings, of which 14 are Buy compared to 6 Holds. The average target price of $20.90 suggests an upside of 85% from the current trading price of $11.31. (See Sunrun’s stock forecast.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
