Everything we do depends on electricity – the modern world would grind to a halt without it. That makes power generation, and the public policy related to it, an urgent matter, and one that no one can ignore. It has also opened up multiple opportunities for stock investors, from traditional utility companies to newer firms that have popped up in recent decades in the renewable energy niche.
That niche comprises a variety of segments – but the one we’re looking at here is solar. Solar power firms bring an advantage, that they can operate at scales from single buildings to industrial-grade installations covering scores of acres. The small end of that scale, solar power systems for individual homes in the residential sector, has caught the attention of the international investment and banking giant Deutsche Bank. Industry expert Corinne Blanchard has evaluated several companies in the space, and outlined their paths forward, into ‘bright days,’ as she puts it.
Of the niche in general Blanchard writes, “Our bullish outlook on the solar group is underpinned by considerable growth opportunities for the US residential market and the most powerful and positive regulatory environment the industry has ever seen. We believe tailwinds will outshine any short-lived negatives. Our equity positioning favors quality names that look well set to benefit from a growing untapped market (currently 4% to reach 15% by 2030) and boosted Solar Demand in the US and in key international markets.”
Within that stance, Blanchard favors the residential solar companies, as these firms have the largest available untapped total addressable market. We can follow her line of thought by taking a deep dive into two of her stock picks. According to TipRanks database, these stocks have both earned Strong Buy ratings from the rest of the Street. Let’s take a closer look.
Sunnova Energy International (NOVA)
We’ll start with Sunnova, a solutions provider of solar-powered renewable energy in the US residential markets. The company has its hands in the complete process of home solar installations, from the rooftop panels to the power storage batteries, and backs up its products with repairs, modifications, and/or replacements as needed to complete a project or comply with building codes. Sunnova will even provide financing options allowing customers to afford and pay for the solar installation, and also offers options for insurance and maintenance plans.
Last month, Sunnova reported its 3Q22 results and the key metric was in customer growth. Sunnova increased its customer base by 21,800 in Q3, and at the end of the quarter boasted a total of 246,600 contracted customers. This was an increase of almost 10%, and brought the company an $80.5 million revenue increase over the year-ago quarter. The total top line in Q3 hit $149.4 million, up 116% year-over-year.
Sunnova expects that it will be able to maintain, and even increase, its business and customer-base growth going into next year, citing two main reasons. First, the company sees a boost from increased demand for reliable and affordable renewable energy – and second, the political policy implications of the recent Inflation Reduction Act promise government support for the business.
On the public relations front, Sunnova found another boost recently, when it stepped in to provide emergency power generation in Puerto Rico following Hurricane Fiona. The company set up power generation and storage systems that provided nearly 2 gigawatts total of electricity for over 30,000 people for more than two weeks.
Deutsche Bank’s Blanchard sees this solar company holding a sound position for forward growth, and so to bring returns to investors. She writes, in her initiation of coverage note, “We project Sunnova to grow its customer base 43% in 2023, adding 120k new customers, in line with guidance, bringing total customers close to 400k by next year. While macro conditions (with high inflation and increasing interest rates) will remain key in investors discussions, we believe it can largely be offset by the 30% ITC extension (from 26% previously) and overall favorable government support, rising utility rates pushing residential customers towards solar. We forecast 2023 revenue to reach $710m, driven by customer additions and a ~28% increase in average number of systems.”
Quantifying these comments, Blanchard rates NOVA shares as a Buy, and her $36 price target indicates potential for a 55% upside in the months ahead. (To watch Blanchard’s track record, click here)
The Deutsche Bank view is far from the only bullish take on Sunnova; this stock has 13 recent analyst reviews on record, which include 11 Buys and 2 Holds for a Strong Buy consensus rating. The shares are selling for $23.28 and their $35.42 average price target implies a robust 52% gain in the next 12 months. (See NOVA stock forecast at TipRanks)
Sunrun, Inc. (RUN)
Next up is Sunrun, another company operating in the residential solar niche. Sunrun has been in business for 15 years, and offers numerous packages for residential solar installations. The package deals include custom fitting for each home, to make the installation a perfect fit for the buyer’s power needs and geographical location. The company handles the full range of the installation: rooftop photovoltaic panels, storage batteries, smart control systems, and the connection with the local electricity grid. Customers can power their own homes – and can even sell power back to the grid.
Sunrun reported strong numbers in its recent 3Q22 financial release, including a 44% y/y increase in revenue, to $631.9 million, that was powered by a 21% increase in the customer base. Year-over-year, the company added 35,760 new customers in the quarter, to a total of 759,937. The customer gains were most pronounced during the summer months, and in July Sunrun had an all-time company record for weekly sales activity.
Looking forward, Sunrun shows strong annual recurring revenue, or ARR, a key metric that indicates future performance. ARR was up 5.6% in Q3, to $969 million, and the average remaining contract life per customer came in at 17.6 years. These numbers bode well for Sunrun’s stability over the long term.
Checking in with Corinne Blanchard again, we find that she’s initiated Deutsche Bank’s coverage of Sunrun with a Buy rating and a $36 price target showing room for a 15% gain on the one-year time frame.
Backing her stance, Blanchard writes, “Sunrun is well positioned to benefit from the accelerating US Residential solar demand, supported by favorable
government policy support. Both customer additions and pricing increase will support top line growth and value generation. Sunrun can also further expand its product offering with battery and energy storage, supported in its efforts by its stake in Lunar and partnership with Ford.
Overall, Sunrun gets a Strong Buy from the analyst consensus, based on 14 recent reviews that break down 13 to 1 in favor of Buy over Hold. The stock has an average price target of $48.15, suggesting a strong 54% one-year upside potential from the current trading price of $31.34. (See Sunrun stock forecast at TipRanks)
To find good ideas for solar stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
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.