Solar stocks rallied on Monday after President Joe Biden imposed a pause on new tariffs on imports of solar panels and components for two years from four Asian countries: Cambodia, Malaysia, Thailand, and Vietnam. A decade ago, the U.S. imposed tariffs on solar imports from China to prevent it from dumping low-priced, subsidized products into the country. The Commerce Department is investigating whether Chinese companies circumvented these tariffs by routing imports through the four Asian countries.
If found true, such circumvention would attract retroactive tariffs of up to 250%, which had effectively halted solar component imports from these countries. As per Biden's latest plan, no new tariffs would be imposed on imports from the four countries for at least two years. Although Biden's plan may help revive the solar industry in the short term, there are several long-term growth drivers as well that make solar stocks attractive.
Let's discuss three top solar stocks that look appealing right now: SolarEdge Technologies (SEDG 1.92%), Enphase Energy (ENPH -5.56%), and Sunrun (RUN -2.43%).
Solar companies should benefit from the tariff halt
Biden's freeze on new tariffs for two years from the four Asian countries will spur growth in the U.S. solar industry. According to Reuters, these countries account for 80% of U.S. solar imports. There are several ways in which solar companies may benefit from the new plan. First, the imports will stimulate utility-scale solar development projects, in turn benefiting solar inverter suppliers such as SolarEdge and Enphase Energy.
Second, it will likely boost residential and commercial installations, benefiting companies such as Sunrun. Finally, certain manufacturers that depend on imported parts may also benefit from this plan.
Demand for solar inverters is expected to rise
Top solar inverter supplier SolarEdge expects that the global shipments of inverters, even excluding China, will grow at a compound annual rate of 10.5% from 2021 to 2025.
Image source: SolarEdge Technologies.
The global shipments may rise from 126 gigawatts in 2021 to 187 gigawatts in 2025. SolarEdge and Enphase Energy are the top players in this segment. Both companies have been growing impressively in the last few years.
SEDG Revenue (TTM) data by YCharts
With innovative offerings that find robust demand, both SolarEdge and Enphase Energy are expected to continue growing in the years to come. SolarEdge derives roughly 40% of its revenue from the U.S. while 80% of Enphase Energy's revenue are from the U.S. So, a revival in the U.S. solar industry could benefit Enphase Energy more in the short-term. At the same time, the expected growth in global shipments is a longer-term catalyst for both the companies.
The residential solar market is underpenetrated
Only 4% of detached, occupied single-family housing units in the U.S. currently have solar installations. Though this is a significant improvement from just 0.3% of homes in 2011, the penetration is still very low.
Image source: Sunrun.
If the residential solar industry grows 15% annually, Sunrun estimates the penetration to still reach to just around 17% by 2031. Notably, assuming that 77 million out of around 79 million detached, occupied housing units (as per the 2019 census) are addressable homes for residential solar is aggressive. It is estimated that only around 80% of these units may be suitable for a solar installation. And we are not even considering economic viability or credit scores, which may bring addressable units further down. Though, the addressable market looks a bit optimistic, falling solar and battery costs may make solar increasingly viable to those for whom it isn't today.
Even if we take the above projections with a pinch of salt, residential solar has immense growth potential. Rising retail electricity utility rates, disruptions to supply, falling solar and battery costs, and concerns relating to climate change are expected to drive long-term growth in the residential solar market.
Sunrun is a top player in the U.S. residential solar market based on solar capacity installed. In addition to scale advantages, it also can cross-sell or upsell to its existing customers. Overall, Sunrun looks to be the most well placed among residential solar installers to benefit from the expected growth in the industry.
