Goldman predicts clean hydrogen will be a $1 trillion market. Here's how to play it.

Published Fri, Jan 27 202311:00 AM ESTUpdated Wed, Feb 1 20232:00 PM EST

In the race to reduce global carbon emissions to zero, clean hydrogen is increasingly expected to be a winner. Hydrogen is the most abundant element in the universe, and has long been looked to as part of the solution as the world shifts away from fossil fuels. But the path to its use has been riddled with obstacles. Top among them has been its cost, but new methods of hydrogen production are less expensive, and that's a gamechanger that could propel hydrogen stocks in the years to come. "We believe that clean hydrogen has emerged as a critical pillar to any aspiring net zero path, aiding the de-carbonization of [circa] 15% of global [green house gas] emissions across sectors," Goldman Sachs analysts wrote in a recent research report on the topic. The firm estimates that the total addressable market for hydrogen generation could reach more than $1 trillion by 2050. To get to net zero by that date, Goldman projects $5 trillion will need to be invested in the hydrogen supply chain. Goldman said hydrogen is versatile and generates a lot of power , which means it can be used for things like moving heavy vehicles and heating furnaces to make steel that aren't easily accomplished by other fuel sources. Industrial applications, which account for most of the the hydrogen demand today, will represent only 15% of total hydrogen demand by 2050, according to a November report on the industry published by the Hydrogen Council in collaboration with McKinsey & Co. The most powerful use for hydrogen by 2050 is expected to be in mobility, including in heavy trucking, aviation and container ships, McKinsey said. Hydrogen can also be used for long-duration and high-capacity energy storage, which is key to increase reliance on solar and wind renewable energy. What's changed Although hydrogen is abundant, it is usually attached to other molecules and the chemical bonds must be broken to extract the hydrogen. In the vast majority of cases, this has been accomplished using a fossil fuel like natural gas, which can contribute to climate change. But "green" and "blue" hydrogen are changing the equation, Goldman said. Green hydrogen is generated by extracting the molecule via water electrolysis in which the electricity used is powered by renewable and low-carbon energy, resulting in no emissions. As the costs of renewable power falls, green hydrogen is becoming a better solution to decarbonization, Goldman said. The firm expects more than $2 trillion to be spent on buying the hydrogen electrolysis equipment that will be required to reach net zero. Blue hydrogen, on the other hand, refers to natural gas-based hydrogen supported by carbon capture, utilization and storage technologies. These technologies have been "largely under-invested" in the past decade, according to the report, paving the way for further growth and innovation of the technologies, which are also vital to a low-carbon and low-cost transition to clean hydrogen. "We see the potential quadrupling of this industry by the end of the decade," the report said about blue hydrogen. How to play it Goldman said buy-rated First Solar is among the key players in the generation of green hydrogen. Goldman isn't alone in liking First Solar, the largest U.S.-based solar panel developer. On FactSet, the stock has an average rating of overweight with a target price of $181.35. That implies more than 3% upside from where it closed Thursday. In the past year, shares have skyrocketed more than 131%. First Solar will benefit from manufacturing credits from the Inflation Reduction Act and is likely to see its profit margins improve, Goldman said. FSLR 1Y mountain Shares of First Solar have skyrocketed more than 120% in the past year. The IRA includes a hydrogen production tax credit of a maximum $3 per kilogram if hydrogen is produced without releasing any carbon emissions. Experts say the tax credit makes nuclear hydrogen highly competitive with fossil fuel produced hydrogen, as companies can look to make clean hydrogen without losing any money. The U.S. Department of Energy has a goal to eventually reduce the cost of clean hydrogen to $1 per kilogram in a decade. Right now, it can cost $5 per kilogram to produce with renewable energy. Fuel-cell manufacturer Plug Power has been in the clean energy industry for decades, but its focus is increasingly on hydrogen production . The company is rated as overweight on FactSet with a target price of $26.80 , which suggests shares could gain as much as 74% from Thursday's close. The stock is up 22% this month. PLUG 3M mountain Plug Power shares are up more than 34% so far this year, but the stock has lost most of the gains it saw in the past six months. In the current recessionary environment, Goldman expects Baker Hughes shares are a defensive play. The company may wind up operating in several segments of the hydrogen supply chain, including storage. Goldman analyst Neil Mehta said its exposure to liquefied natural gas and continued expansion into industrial energy technologies are strengths. The company is rated overweight with a target price of $35.92, according to FactSet. Its stock price has increased by nearly 15% over the past year, fueled by higher energy prices. If the stock hits its average price target, it will have gained 13% from its close on Thursday. While Baker Hughes missed Wall Street's fourth-quarter profit expectations, the company is upbeat for the coming year. It restructured its business last year into two segments, one for oilfield equipment and services and the other for industrial and energy technology. Its oil-focused division reported a 12% increase in sales year over year to $3.6 billion, while its energy-centered division saw a 1% increase in revenue from the prior year to $2.3 billion. "Given sharp performance, risk/reward looks particularly compelling for BKR from current levels as we move into 2023," Goldman analyst Neil Mehta said in a note earlier this month on the stock, which it rates a buy. Goldman identified both Air Products & Chemicals and Linde as integrated clean hydrogen supply chain players. It has a buy rating on both stocks. Analyst Duffy Fischer said Air Products is "leaning into the narrative that hydrogen will become a major clean energy source in the years to come." The company has dedicated $10 billion in capital to its efforts in the space, he said. As the largest industrial gas company, Linde has "significant upside" in both blue and green hydrogen, Fischer said. However, the company is being cautious in putting big investments behind it unless it has already locked in customers, he said. Other U.S. stocks it mentions include Cummins , NextEra and 3M .