Falling costs, improved technology, and policy support -- the tailwinds are firmly behind solar stocks. The share of solar energy in global electricity generation is expected to rise from a mere 3% currently to roughly 20% by 2050. That would surely benefit solar stocks and explains investors' euphoria for the sector. As a result, solar stocks, including ReneSola (SOL +0.00%), have risen significantly lately. After already more than doubling in 2021, let's see if ReneSola stock is a buy right now.
Focused operations
To better understand ReneSola's prospects, it's imperative to briefly look at the company's history. ReneSola's beginnings go back to 2005, when it started its solar power business in China. Up till 2017, ReneSola was primarily involved in the manufacture of solar wafers and panels. However, the company was incurring losses and losing market share to competitors.
SOL Net Income (Quarterly) data by YCharts
As the above graph shows, ReneSola's revenue was on a downward trend against growing revenue for competitors such as Canadian Solar (CSIQ 0.46%) and JinkoSolar (JKS +0.56%). Its profits remained low or negative, even when the other two companies churned profits. This forced ReneSola to dispose of its manufacturing businesses in 2017 and become a pure-play solar project developer and operator. This business requires far less capital investment and can generate higher margins.
ReneSola has also overhauled its management team. What all this mean is that ReneSola may perform far differently in the future. Solar companies are increasingly going down the specialization path as growing the bottom line continues to be a challenge and margins remain under pressure. So, could this be a winning strategy for ReneSola?
Image source: Getty Images.
Improved prospects
ReneSola's recent performance does seem to support its strategy. In the third quarter last year, ReneSola posted profits for the second consecutive quarter. It expects to remain profitable in the fourth quarter as well. The company recently entered into several joint ventures in its key European market. Moreover, a potential partnership with European asset manager Eiffel Investment provides ReneSola with funding for its projects in Europe. The company has projects in more than 10 countries, but its pipeline is focused on the more profitable U.S. and European markets.
ReneSola has an impressive project pipeline of 730 MW in late-stage projects, backed by agreements. The company also acquired certain projects from Nova Development recently, adding to its pipeline and strengthening its position in the U.S. community solar market.
Valuation and conclusion
As is the case with most solar stocks, ReneSola's valuation looks a bit stretched. The stock's forward price-to-earnings ratio stands at 58 -- much higher than that of Canadian Solar and JinkoSolar. While I like the way ReneSola is growing, I would be skeptical to pay that high a price considering it has yet to prove that it can generate profits on a sustainable basis. The company faces stiff competition from bigger and more established players and margin pressure is intense.
SOL PS Ratio data by YCharts
Moreover, shareholders are likely to face continued dilution as the company raises funds for growth. I would rather watch this stock from the sidelines and wait for a more opportune price to start a position. Meanwhile, there are better opportunities elsewhere in the solar segment right now.
