RBC Capital Markets initiated research coverage on solar energy stocks, highlighting First Solar (NASDAQ:FSLR), Enphase Energy (NASDAQ:ENPH), Shoals Technologies (SHLS), and SolarEdge Technologies (NASDAQ:SEDG) as their preferred selections.
The investment firm’s top pick within the industry is FSLR, citing “strong visibility for revenue and earnings growth, and free cash flow optionality over the next few years.”
RBC started FSLR’s coverage with an Outperform rating and a target price of $195.
ENPH and SHLS also earned that rating, while SEDG was initiated at Sector Perform.
“We believe both rooftop and utility solar should continue to benefit from global decarbonization efforts and believe demand will steadily improve as interest rates ease,” analysts said in a note on Tuesday.
The industry's valuation multiples are currently at low levels due to difficult macroeconomic conditions and uncertainty in demand. Nonetheless, RBC thinks that the industry is approaching a turning point, and the outlook is expected to get better as clearer indications of stability become apparent.
“Under current conditions, we favor utility scale solar weighted names that we believe will continue to benefit from demand resiliency and IRA incentives that promote domestic operators and provide some insulation against foreign competition,” the analysts wrote.
The outcome of the upcoming presidential election in the US could also play an important role.
In the short term, a Republican administration may pose challenges to the industry, potentially causing investment delays and greater volatility, with a divided stance on the IRA policy making a repeal difficult, even with a Republican sweep of Congress.
Conversely, a Democrat administration would eliminate the risk of an IRA repeal but might adopt trade policies that could harm domestic manufacturers' competitiveness. Still, this could potentially boost solar demand.