Shares of solar stocks like SolarCity Corp (NASDAQ:SCTY) and Sunedison Inc (NYSE:SUNE) have been taking a beating since last month when investors started dumping momentum stocks. Goldman Sachs analysts believe the selloff has simply made it more attractive for investors to buy into them. They have reiterated their Attractive view and named SolarCity and Sunedison as their top picks in the sector.
Why they like SolarCity
In a note dated April 10, 2014, analysts Brian Lee, Thomas Daniels and Britt Boril note that shares of SolarCity Corp (NASDAQ:SCTY) have fallen by between 20% and 30% since last month. They particularly like the company because it is in the rooftop segment of the solar industry. In fact, they recommend that investors steer clear of the utility segment, where First Solar, Inc. (NASDAQ:FSLR) has most of its exposure.
They believe the U.S. rooftop solar market will approach 50% annually through 2016, compared to a 12% compound annual growth for the utility segment. They say SolarCity Corp (NASDAQ:SCTY) has the highest exposure to rooftop demand at more than 95%.
Both SolarCity, Sunedison benefit from evolving business model
The Goldman Sachs team thinks this year is going to be a key one for the solar industry in terms of milestones. They note that the industry is shifting to an “own and operate” strategy from the previous “build and flip” model. They don’t think all solar companies are positioned to take part in this change fully, but they think SolarCity Corp (NASDAQ:SCTY)’s increasing scale will enable it to see growing diversification in financing sources, especially in asset-backed securities.
They also said Sunedison Inc (NYSE:SUNE) is becoming more focused on pushing an own and operate strategy. The company plans to retain about 50% of its constructed projects going forward and expects to announce a yield vehicle IPO later this year.
Global solar demand on the rise
The analysts say investors became extremely bearish because of 2012’s sub-10% growth of the solar industry. However, they say global demand rose by about 25% year over year. This year, they expect the growth momentum to continue because of data from the first quarter, which suggests volume growth in megawatts of about 35% year over year during the first quarter.
They see the most attractive megawatt growth potential in SolarCity Corp (NASDAQ:SCTY) and Sunedison Inc (NYSE:SUNE) over the next few years. They’re projecting SolarCity to record 74% compound annual growth and Sunedison to post 67% compound annual growth—both of which would be well above their peers.