Goldman remains bullish on solar stocks after a big year but has some new picks for 2021

Published Tue, Jan 5 202110:47 AM ESTUpdated Tue, Jan 5 20214:20 PM EST

(This story is for CNBC PRO subscribers only.) Solar stocks and renewable energy companies had a record 2020, and Goldman sees more gains ahead as solar becomes increasingly popular. "We remain positive on solar equities heading into 2021 given ongoing secular growth amidst renewed policy support and attractive financing conditions, while leverage to emerging high-growth verticals like battery storage adds scarcity value to certain pockets of the group as well," the firm said in a recent note to clients. While Goldman remains bullish on solar broadly, the firm noted that within the space investors should favor specific areas of the market — namely companies focused on residential installation. The firm adjusted its stock recommendations, including upgrading Enphase Energy to a buy rating. The microinverter company, which is set to join the S & P 500 before trading begins on Thursday, gained an eye-popping 571% in 2020. Still, Goldman sees shares advancing another 34% to $232 over the next 12 months. On the flip side, the firm double downgraded shares of First Solar from buy to sell. "The recovery has been swift and faster-than-expected. Looking ahead to 2021, we believe US solar demand is back to, if not actually trending above, prior expectations for growth before the onset of the pandemic in early 2020," the firm said. When it comes to Enphase, Goldman said the company is the fastest-growing technology play within solar, and that the company's growing battery business should drive further upside. The firm pointed to four key catalysts: share gain, new product growth, international expansion, as well as new end market growth including commercial. Enphase's total addressable market currently stands at $2 billion, which the firm sees expanding to $14 billion over the next several years. Goldman envisions battery revenue to be the largest contributor to Enphase's growth, rising from $60 million in 2020 to more than $400 million by 2022. "We believe ENPH remains a relatively early secular growth story within the solar landscape that merits strong consideration as a core holding given its multi-year, multi-faceted growth potential," analyst Brian Lee said. Shares of Enphase gained 5.36% on Tuesday. Across residential solar, Lee believes there will be a "significant resurgence" in 2021 thanks to factors including cost savings for consumers, access to low-cost financing for consumers and installers, as well as growing demand in the face of grid reliability issues. President-elect Joe Biden is also a catalyst, given his ambitious climate policies. Goldman also lifted its 12-month price target on shares of buy-rated Sunnova and SunPower . The former went from $44 to $60, and the latter from $23 to $33. Goldman has a neutral rating on Sunrun , which is the largest residential installer, although the firm did lift its target on the stock to $67 from $61. While Goldman sees a jump in demand for solar, the firm believes it still won't be quite fast enough to keep apace with the supply that's now on the market, leading to pricing pressure for manufacturers. That's the reasoning behind the firm's double downgrade of First Solar. "FSLR's earnings and revenue have already peaked for this cycle, and we expect FSLR's gross margins to similarly peak in 1H21," Lee said. "Looking ahead, we believe EPS declines starting in 2022 will be further exacerbated by weaker industry pricing moving through next year, as we see the supply-demand dynamic in modules as one of the more challenged areas of the supply chain in the near-to-medium term." Goldman also cut its 12-month price target on First Solar to $81 from $101, implying a 20% downside from where shares closed on Monday. First Solar shares lost 9% on Tuesday. - CNBC's Michael Bloom contributed reporting.

Solar panels above a Brooklyn neighborhood overlooking Manhattan.

Jeff Morganteen | CNBC

(This story is for CNBC PRO subscribers only.)

Solar stocks and renewable energy companies had a record 2020, and Goldman sees more gains ahead as solar becomes increasingly popular.

"We remain positive on solar equities heading into 2021 given ongoing secular growth amidst renewed policy support and attractive financing conditions, while leverage to emerging high-growth verticals like battery storage adds scarcity value to certain pockets of the group as well," the firm said in a recent note to clients.

While Goldman remains bullish on solar broadly, the firm noted that within the space investors should favor specific areas of the market — namely companies focused on residential installation.

The firm adjusted its stock recommendations, including upgrading Enphase Energy to a buy rating. The microinverter company, which is set to join the S&P 500 before trading begins on Thursday, gained an eye-popping 571% in 2020. Still, Goldman sees shares advancing another 34% to $232 over the next 12 months. On the flip side, the firm double downgraded shares of First Solar from buy to sell.