Solar Stocks Surge as Yields Fall, Goldman Sees 38% Upside

Key Takeaway

• Solar stocks surge as declining Treasury yields, from 4.85% to 4.63% for the 30-year and 4.73% to 4.50% for the 10-year, lower borrowing costs.
• Goldman Sachs sets a bullish price target of $268 for First Solar, reflecting a potential increase of 38%.
• Invesco Solar ETF trades at a more affordable multiple of 22 times forward earnings compared to its peak valuations during the 2020-2021 period.

Solar Stocks Shine Amid Yield Dip

The solar sector has emerged as a standout performer in recent weeks, buoyed by a favorable shift in long-dated U.S. Treasury yields and positive corporate earnings. The Invesco Solar ETF, a barometer for the industry, has notably benefited from these conditions. A decline in the 30-year Treasury yield from 4.85% to 4.63%, alongside a dip in the 10-year yield from 4.73% to 4.50%, has played a pivotal role. This reduction in borrowing costs is particularly advantageous for capital-intensive sectors like solar energy, where financing expansive projects is a significant part of operations.

Treasury Yields and Solar Stocks: A Negative Correlation

The inverse relationship between solar stocks and Treasury yields is pronounced. As yields drop, the cost of borrowing decreases, which can enhance the profitability of solar projects and, by extension, the attractiveness of solar stocks. This dynamic is underscored by the sensitivity of solar companies' valuations to changes in the discount rate applied to their expected future cash flows. A decrease in Treasury yields, therefore, not only reduces borrowing costs but also potentially increases the present value of future cash flows, making solar stocks more appealing to investors.

Analyst Optimism and Valuation Perspectives

Goldman Sachs analyst Brian Lee has expressed optimism about the solar sector, particularly highlighting First Solar Inc. as a company poised for growth, partly due to its exposure to renewable demand from data centers. With a 12-month price target of $268 for First Solar, Goldman Sachs anticipates a significant upside. Furthermore, the current trading multiple of the Invesco Solar ETF at 22 times forward earnings suggests solar stocks are more affordable now than during their peak valuations in the 2020-2021 period, indicating a potentially attractive entry point for investors.

Macroeconomic Factors and Federal Reserve Policies

The trajectory of the solar industry is closely tied to broader macroeconomic trends, including inflationary pressures and the Federal Reserve's monetary policy. A decrease in inflation leading to lower Treasury yields, spurred by expectations of a Federal Reserve policy shift, could further enhance the sector's outlook. The anticipation of Federal Reserve rate cuts is a critical factor that could shape the future prospects of solar stocks in the months ahead.

Street Views

• Brian Lee, Goldman Sachs (Bullish on First Solar):

  "The pricing environment could be inflecting soon... renewables demand from data centers represents a meaningful portion of FSLR’s demand mix."