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Donald Trump assumed the US presidency on Jan. 20. The change in administration brings the potential for policy changes to wind and solar tax credits in the coming months.
Why it matters: The US solar industry benefits from federal incentives, most notably a 30% investment tax credit. Under the Inflation Reduction Act, the federal incentives for renewables were extended until at least 2032. We think this date is at risk under the Trump administration.
While a full repeal of the act is unlikely, we expect changes to wind and solar tax credits. Our base case is that the administration accelerates their expiration date to 2027.In the near term, we anticipate a rush of industry activity to qualify projects under the current incentives. However, in the long term, the accelerated expiration should weigh on profitability as the industry looks to offset reduced incentives.
The bottom line: We are adjusting our fair value estimates for Sunrun (to $10 per share from $15), Nextracker (to $31 from $34), and Enphase (to $68 from $75), while maintaining our fair value estimates for First Solar ($190), SolarEdge ($18), and Shoals ($5).
We are maintaining our no-moat ratings across our solar coverage. We continue to view solar as a promising long-term technology, but one that does not lend itself to moats.Most of our solar coverage is currently in 3-star territory, since we think the market has appropriately priced in the risk of policy changes. Should the policy uncertainty result in a further selloff, we would look to First Solar and Enphase for potential opportunities.
Below, we highlight our key thoughts on each company within our solar coverage.
First Solar
This is the solar company most immune to the change in administration. While Trump’s potential policy changes could weigh on solar demand, they will likely benefit First Solar’s competitive position. The firm is the largest domestic manufacturer of solar modules, and we expect the administration to support its reshoring theme. We see minimal risk of First Solar’s manufacturing tax credits being repealed, while they could be restricted for Chinese-based competitors, benefiting its competitive position. However, with little room to add further US manufacturing capacity, we see few medium-term reinvestment opportunities, resulting in our fair value estimate of $190 per share being well below the street average of $265.
Enphase
Potential US policy changes will likely impact the rooftop solar market more than the utility-scale market. Enphase’s microinverters are focused on the rooftop market, but we see the firm as better positioned within the value chain. Additionally, its international exposure (approximately 25% of sales) helps offer diversification. We view its next-generation microinverter, IQ9, slated to launch later this year, as key to unlocking growth in additional geographies and market segments. The stock’s valuation has come way down relative to its history, but shares still trade in 3-star territory.
Nextracker
Here we have the most out-of-consensus view within our solar coverage. The market likes the firm’s consistent execution since it’s gone public, which we agree with. However, we take a more conservative view of Nextracker’s long-term margins than the street, as shown by our no-moat rating. We expect long-term EBITDA margins to moderate to the mid-teens, while we believe the street is extrapolating that today’s low-20% margins will continue indefinitely. Thus, we see shares as overvalued.
Sunrun
We expect 2025 to offer some green shoots as the US rooftop solar industry returns to growth and Sunrun achieves positive full-year cash generation for the first time. However, the question is how durable cash generation can be, given the long-term policy uncertainty. We think Sunrun is among the most sensitive stocks in our coverage to changes in solar tax credits. We expect deleveraging of the corporate balance sheet to be a top priority in 2025 amid long-term policy uncertainty.
SolarEdge
This firm’s prospects are more tied to a recovery in European rooftop solar demand (its main market) than to US policy. We see a measured but elongated recovery in the European market. Key topics for 2025 will be the balance sheet and margin recovery. Our base case is that the company will not need to raise additional debt or equity financing.
Shoals
We expect Shoals to return to growth in 2025, as it looks to bounce back from a challenging 2024. However, we await further clarity on potential competitive pressures following a recent adverse patent ruling before we can be more positive on the stock.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
