Goldman Sachs explains how President Biden's proposed policies could lead to 60% spike in solar-power volume — and breaks down 3 non-Tesla stocks set to benefit

• Solar power is set to boom as costs decline and battery tech makes it more accessible.
• Tesla’s North American Solar Projects could be worth $250 billion annually in the longer term, the bank said.
• Goldman estimate installations will be 60% above Biden’s policy aim for 500 million panels in the next 5 years.
• Visit the Business section of Insider for more stories.

The energy transition trade is heating up, and investors are looking tap into those companies and technologies that will power  the homes and cities of the future.

Across the board, this has meant significant gains for companies that are focussed on sustainability. For example, shares in Danish wind power provider Orsted have rallied around 300% in the last five years, and Chinese Tesla rival NIO gained over 960% in the last 12 months alone.

Now, with tailwinds from President Joe Biden’s supportive green agenda, as well as rapidly declining costs, Goldman Sachs believes solar power is going to be a major beneficiary, thanks to rapid growth in installations of rooftop panels, according to a note on Wednesday.

“We now see solar power entering a secular growth phase,” analyst Brian Lee wrote. Biden’s plan aims to get 500 million panels installed over the coming five years. But Goldman thinks this is conservative and expects 60% more installations in that time. 

After flat growth in 2020, residential solar power is poised to rebound into the double digits, by around 15% year-on-year, as its economics become more attractive and the expansion of its total addressable market, the report said.

“We expect US resi[dential] solar to grow at a three-year CAGR [compound annual growth rate] of 14% through 2023,” Lee said.

A primary driver of growth will be the increasing affordability of the technology, together with consumers’ greater demand for electricity as they work from home, Goldman Sachs said.

With the battery price per kilowatt-hour (kWh) falling in the high-single to low-double digit range annually, Goldman Sachs says home energy storage should also become more affordable for consumers.

The Biden administration also offers substantial tailwinds, notably with a extension of the 30% solar income tax credit (ITC) through 2025 that was reintroduced in the House of Representatives in February, and would allow owners of qualifying energy projects up to a tax credit of up to 30% of their project’s capital costs.

If the ITC extension is passed, this could boost the pace of solar-panel installations even more through 2023, Lee said.

Tesla’s play in the solar market

Tesla, the US-based electric carmaker, has been one of the biggest stories of the last year, largely due to its headline-making CEO Elon Musk, but also the stock’s 360% rally.

Around 6% of Tesla’s revenue in 2020 came from its energy business, with solar power applications accounting for half of that, Goldman Sachs said.

Tesla’s products include solar roof installations, and “Powerwalls” – a lithium-ion battery pack to store energy from solar roof panels.

Falling battery costs and the already significant costs of roof replacement, Tesla has said that its ‘Solar roof’ is financially optimal for the roughly 4 million homes that replace their roofs each year, and for around one million new homes, the report said.

However, this number will take time to materialize, the note said. The annual rate of solar rooftop installations is around 500,00 at present. But if this figure is accurate in the longer-term, Goldman Sachs estimates this could translate into a combined solar roof and storage market worth about $250 billion a year.

These are the three stocks that Goldman Sachs believes offer an effective way to leverage the expansion in the solar-power sector:

Sunnova Energy International

Ticker: NYSE:NOVA

Sector: Solar and installers

Market cap: $4.72 bln

Goldman Sachs recommendation: Buy, on conviction list

Analyst commentary:

“We see NOVA positioned to gain share and maintain its status as the fastest-growing resi solar play in the space through the next several years, including ongoing momentum in battery storage deployment. At the same time, shares are attractively priced at ~24X 2022E EBITDA (incl. P&I), in our view, considering EBITDA growth is averaging 50%-60% through 2022.”

SunPower Corporation

Ticker: NASDAQ: SPWR

Sector: Solar and installers

Market cap: $6.00 bln

Goldman Sachs recommendation: Buy

Analyst commentary:

“In a similar vein, we expect SPWR to benefit from the secular growth tailwind of the residential market as well as the strong demand in battery storage. The company appears to be executing well on its medium-to-long term growth and margin initiatives with 2021 guidance moving up on key metrics such as revenue growth (~35% yoy vs. >30% prior) and gross margin per watt.”

Enphase Energy

Ticker: NASDAQ:ENPH

Sector: Solar and installers

Market cap: $22.15 bln

Goldman Sachs recommendation: Buy

Analyst commentary:

“ENPH remains a relatively early-stage secular growth story given its multi-year, multi-faceted growth potential on the back of (1) share gain, (2) new product growth (e.g., battery), (3) international expansion and (4) new end market growth (e.g., commercial). We see ENPH’s TAM growing from $2bn to ~$14bn over the next several years, underpinning a 45%/130% revenue CAGR in its solar/storage segments and EPS CAGR of 51% over the same period.”

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