Goldman Sachs Puts Aside Worries, Upgrades 3 Solar Stocks

With a 10-year federal investment budget of $385 billion, the clean energy sector would seem to have few worries except how to spend all that cash. But the recent banking crisis has focused attention on how clean energy projects might be affected by the overall financing and macroeconomic environment. In other words, a lot can happen in 10 years, and not all of it will be good.

Analyst Brian Lee and his team at Goldman Sachs, in a research note last September, raised their estimate for solar capacity growth through 2025 from 25% to 30%. Battery storage capacity growth was forecast to rise from a 2022 level of around 7,000 megawatts to nearly 90,000 by 2030, an annual growth rate of 29%.

While Lee did not change those estimates in a new report issued this week, he and his team noted a few concerns. Chief among these were the financing environment and sustainability of growth in the residential solar business and the dispersion of investment dollars due to higher levels of stock-picking in the sector.

Goldman’s analysts continue to prefer utility-scale stocks over residential-focused, and U.S. companies focused on domestic markets, including especially companies with “manufacturing footprints.” In their new report, they wrote:

We continue to see a number of factors driving a healthier fundamental backdrop for the utility-scale sector, including (1) higher growth potential (~20%-25% [year over year] for utility-scale in ’23 vs. ~5%-10% for [residential] ), (2) higher impact from IRA [Inflation Recovery Act] tailwinds, including manufacturing credits, that we expect to tangibly show up in financial metrics, and (3) easier comps as [residential] outperformed expectations last year whereas utility-scale missed consensus views owing to project timing/supply chain/trade policy issues.

Lee and his team raised their ratings on three stocks and changed their price targets on five others.

Fluence Energy Inc. (NASDAQ: FLNC) was upgraded from Neutral to Buy based on a potential upside of 83% to Goldman’s $29 price target (up from $25) on the stock (as of Tuesday’s closing price of $15.84). The analysts’ view of Fluence, a designer and manufacturer of energy storage products, is based on three strengths: achieving a break-even adjusted EBITDA ahead of the target timeline, upside from federal support for battery production and continued execution in the fast-growing energy storage market.

The company has beaten revenue estimates in three of the six quarters that it has been publicly traded, and expectations for the March quarter are 25% above actual revenues in the December quarter and 13% higher than revenue for the year-ago quarter. The stock’s 52-week trading range is $4.96 to $26.78, and shares have added more than 40% over the past 12 months. The shares traded up about 15% in the late morning on Thursday.

SunPower Corp. (NASDAQ: SPWR) received an upgrade from Sell to Neutral based on a more balanced risk-reward picture. Goldman’s analysts left SunPower’s price target of $13 unchanged. This upgrade comes despite SunPower’s “heavy mix of new homes and cash/loan sales in the backdrop of a tougher consumer spending environment.” These concerns have weighed on the stock’s performance, but the company has the “cleanest balance sheet/lowest leverage ratio among peers, with its 2022 ending net cash position of ~$30mn.”