Solar Companies May Have 'Multiple Beats', According To Goldman Sachs

This earnings season, Goldman Sachs expects multiple residential solar stocks to outperform Wall Street expectations.

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Among residential solar stocks to watch this earnings season, Brian Lee suggests SolarEdge, Sunrun, and Enphase gave near-term tailwinds that may boost earnings. However, levered utility stocks in the solar space are unlikely to be as well supported this quarter as they were last quarter.

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"We anticipate investors' focus shifting to micro versus macro themes ahead of 1Q23 earnings season. Several beats/guidance raises could be generated across the group in our view as near-term fundamental trends in [residential] solar appear stronger than previously anticipated. Utility-scale levered stocks may have lower near-term upside." Lee said.

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The performance of solar stocks this year has been modestly below that of the broader market. As of the end of March, the Invesco Solar ETF (TAN) had gained 7.5% year to date, while the S&P 500 had added 8.2%.

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The Inflation Reduction Act will have less of an impact this quarter, Lee said. Earlier this year, Treasury is expected to release its disclosure on domestic content and manufacturing credits.

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California and the Northeast could offset weakness in the South in the first quarter, Lee said. Furthermore, the price of polysilicon, a raw material made from silicon, declined in the first quarter.

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While Sunrun and Enphase are expecting slower growth in the second half of the year, he warned the residential beats would not last. Despite the risks, SolarEdge has a higher chance of sustaining its outperformance.

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He rates the three stocks in the residential solar sector as buys. When they report earnings in the first quarter, he expects them to do the following:

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Enphase

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Lee believes Enphase will beat on sales as well as earnings per share.

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The company is expected to report sales of $737 million and earnings per share of $1.34. FactSet expects sales of $715 million and earnings per share of $1.21.

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In line with the company's guidance, Lee models a 10% decline in storage shipments.

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His forecast for second-quarter earnings and revenue is $1.39 per share and $765 million respectively. Analysts expect the company to generate $754 million in revenue and $1.28 per share, exceeding Wall Street's consensus.

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The share price of Enphase has fallen 14% this year. The average price target implies a 27.2% upside, according to Refinitiv, nearly four out of five analysts agree with Lee.

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SolarEdge

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Lee expects the company to earn $2.19 per share, higher than the $1.94 consensus estimate from FactSet. The company's sales are also expected to exceed expectations at $939 million instead of $930 million.

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In addition, he said revenue would be close to expectations.

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Based on Lee's forecast, the company's revenues will come in slightly below consensus expectations at $981 million in the second quarter. As investors focus on trends in European and U.S. residential businesses, the company should raise guidance above expectations to $2.33 non-GAAP per share.

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Currently, SEDG is set for another beat and raise due to continued volume strength in Europe as well as a rebound in margins due to better pricing and euro FX trends, he said. In addition, the US business has been more stable in the first quarter given ongoing demand trends in CA, although SEDG's diversified sales mix allows this to be less of a tailwind compared to its peers.

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There has been an increase of 11.7% in shares this year. Refinitiv estimates the stock could rise another 16.6% in the next year, based on the average price target. Analysts rate the stock a buy in nearly three out of four cases.

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Sunrun

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Lee predicts Sunrun's quarter will be tougher than last quarter.

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According to Lee, first-quarter revenue will be $493 million, under the consensus estimate of $522 million. The company is expected to post a larger loss per share than FactSet estimates, with his estimate of 22 cents per share 9 cents higher than FactSet's estimate of 13 cents per share.

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A company's financial capabilities and backlog will be of interest to investors, he said. In addition, Lee predicted better demand in the near term.

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Lee said that he will watch for commentary about quarterly margins and if there is more pressure in 2H23 if installation growth slows down, but he did not give specific forward-looking estimates. As well, he suggested that pricing trends may ease throughout the year, which could increase margins.

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Refinitiv's average analyst expects the stock to rise 85.1% next year despite a 15.5% decline this year. The stock has a buy rating from three of every four analysts.

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