The solar stocks to own in 2024, according to Piper Sandler

The recent Fed pivot represents a major macro theme for renewables heading into 2024 and is an improvement for the related stocks in Piper Sandler’s coverage, the firm tells investors. Benefits should accrue for installers initially in 2024 and inverters eventually in 2025, with the rest of the space benefiting long-term, the firm says.

Piper Sandler notes it likes businesses with high visibility to forward revenue growth and positive earnings momentum with reasonable valuations. The firm highlights Nextracker (NXT) and Itron (ITRI) as its favorite ideas in the sector heading into the new year.

KEY THEMES ENTERING 2024: Piper Sandler identifies several key clean energy investment themes for 2024. First, renewable projects rely on project finance, causing many of the names under Piper Sandler’s coverage to be highly sensitive to changes in rates and credit spreads. Since the Fed meeting on December 13, names in the sector have rallied 24%. With lower rates, Piper Sandler sees residential installers as the most immediate and largest beneficiaries, leading the firm to upgrade both Sunrun (RUN) and Sunnova Energy (NOVA) to Overweight.

Second, Piper Sandler believes the risk-reward scenario for the 2024 election skews negatively. The firm’s macro team believes if Biden wins, he won’t be able to expand the IRA, while if Trump wins, pieces of the IRA may be repealed. The firm believes First Solar (FSLR) remains the biggest beneficiary of IRA within its coverage.

Next, the firm anticipates another year of “solid growth” for solar and storage stocks, but notes there will likely continue to be stagnation for onshore domestic wind. Additionally, Piper Sandler anticipates U.S. residential solar demand to bottom in 2024, anticipating a 20%-ish decline in installs. Destocking will remain a major theme, and the firm takes a more cautious view on timing relative to management guidance. Lastly, Piper believes liquidity will remain in focus given recent equity moves. Companies that screen poorly on both LTM/Q3 cash burn are more at risk of corporate transactions. Plug (PLUG) and Bloom Energy (BE) strike the firm as tight on liquidity, while SunPower (SPWR) strikes it as a candidate for a capital raise given recent challenges.

FAVORITE IDEAS: Piper Sandler names two stocks, Nextracker and Itron, as its favorite ideas for 2024.

The firm has an Overweight rating and $60 price target on Nextracker. The company’s existing backlog provides good coverage on 2025 consensus estimates and recent structural tweaks to its business should support improved margins and drive favorable earnings revisions. Further, recent trends in the company’s deposits indicate Nextracker is growing its market share relative to its peers.

Itron was upgraded by the firm to Overweight from Neutral with a price target of $91, up from $72. Piper believes the company’s backlog and leverage provides strong revenue visibility, and its improved semiconductors component supply will reduce execution risk. Furthermore, the firm sees the potential for meaningful margin expansion as its margin network solution segment grows and sees meaningful upside to Street EPS expectations in 2024 and 2025.

OTHER RATING CHANGES: Piper has also changed its ratings on several stocks. Sunrun and Sunnova Energy were both upgraded, while Array (ARRY), SolarEdge Technologies (SEDG), and Plug Power were each downgraded.

The firm upped both Sunrun and Sunnova Energy to Overweight from Neutral. Sunrun’s price target was raised to $31 from $15 and Sunnova’s was raised to $26 from $13. Since downgrading both stocks to Neutral back in July 2022, the firm has held the perspective that installer equities cannot work in a rising interest rate environment. Since then, benchmark rates have declined by more than 100bps and the downward bias to ABS credit spreads support a more bullish stance on these stocks. The potential for lower benchmark rates and lower spreads should push Sunrun and Sunnova’s capital back to 6.0% in the coming quarters.

Meanwhile, Piper Sandler downgraded Array to Neutral from Overweight with a $22 price target, down from $26. The firm believes there is limited upside on valuation as well as risks to top-line expectations in California in 2024. Furthermore, the company’s backlog and deferred revenues indicate it is ceding market share to its two largest competitors.

SolarEdge Technologies was also downgraded by the firm to Neutral from Overweight with a $105 price target, down from $110. The company is “clearly” operating in a highly uncertain environment given the headwinds in both E.U. and U.S. markets, the firm says. Due to its weaker returns and margins, Piper Sandler believes the stock should trade at a discount to its prior multiple.

Getting more bearish on the name, Piper Sandler also lowered its rating on PlugPower, downgrading the stock to Underweight from Neutral with a price target of $2.30 from $6.50, citing liquidity risk. The firm believes the company may be forced to pursue working capital financing and dilutive corporate financing to bolster its liquidity. The firm is downgrading its rating due to the uncertainty surrounding PlugPower’s capital over the next 12 months.