Global renewable energy capacity grew by about 13% in 2021 to 272 gigawatts (GW). Solar generation capacity is expected to expand by an additional 25% in 2022, while new wind generation capacity will decline by about 10% year over year.
Mark Strouse, North American alt energy analyst for J.P. Morgan, noted that these estimates are based on current government incentives and the increases could be larger if incentives are increased. The most notable of these potential increases is about $555 billion targeted at energy and the environment over the next decade. Some $320 billion in tax credits lie at the heart of legislation currently being debated in the U.S. Senate.
Another headwind is proposed legislation in California that would change the way homeowners are subsidized for installing rooftop solar systems, cutting the credit they would receive by about 80%. If the proposal is adopted, solar installers likely will shift to marketing systems that include battery storage to capture more value per customer.
J.P. Morgan’s analysts expect the alt energy space “to remain volatile in the near term” while expecting margins to improve as the year progresses:
[W]e note that our space is trading at a ~35% discount to the one-year average multiple and a ~15% discount to the three-year average, implying that long-term investors interested in the long-term decarbonization theme (which is generally not impacted by these near-term headwinds) are being offered an attractive entry point, in our view.
In their note published Thursday morning, the analysts commented on six stocks they rate as Overweight, specifying three as their top picks out of 19 included in the firm’s coverage.
Sunrun Inc. (NASDAQ: RUN) is one of two residential solar installers to be designated a top pick for 2022. The company’s market cap is $5.9 billion, and Sunrun is expected to report fourth-quarter earnings on February 17. The analysts expect Sunrun’s solar+storage business to report double-digit compound annual growth rates (CAGRs) and to increase its market share over the next few years. The company is included on J.P. Morgan’s Analyst Focus List.
J.P. Morgan has cut its December 2022 price target on the stock from $86 to $69, but that still implies upside potential of 125% based on a current price of around $30.60. The stock traded up more than 10% shortly before noon Thursday.
Sunnova Energy International Inc. (NYSE: NOVA) is another supplier of residential solar and energy storage systems. The company’s market cap was around $2.6 billion Thursday morning, following a jump of almost 7.5% in the share price.
J.P. Morgan’s story on Sunnova follows closely its view of Sunrun: solid inventory to meet demand through the middle of this year, some pricing power and a shift to selling residential solar systems with attached storage. The analysts lowered their price target on the stock from $66 to $53, which implies an impressive potential upside of 129% to a share price of around $23.10. Sunnova is another of the top picks in this alt energy space.
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