Much of the climb in solar stocks looks justified by growth prospects, but buyers may still be in for a bumpy ride
2 min
Solar stocks are sizzling—quite an accomplishment for the simplest and most mature of the green-energy technologies. Finding companies that could keep shining might require looking in less obvious places.
The MAC Global Solar Energy Index has generated a 233% return including dividends for dollar investors during the past year. That is well ahead of returns from wind-turbine makers Vestas and Siemens Gamesa, nevermind the S&P 500’s 15%.
As public and political support for green power has broadened, markets have come to expect a decadeslong renewables rollout. It is hard to see any catalyst for a change in sentiment, says Sam Arie, a veteran utilities analyst at UBS. Solar panels can be the cheapest way to generate electricity in many parts of the world. “In some cases it is even cheaper to build a new solar farm than run existing coal plants,” says Alex Monk, a portfolio manager at asset manager Schroders.
The catch is that the shift to renewables doesn’t guarantee shareholder returns. To justify high valuations, investors need to ensure companies have a defensible business as well as growth prospects.
Solar investors have already experienced at least two stomach-churning cycles. A key lesson has been that making panels themselves is a low-margin, hypercompetitive market best avoided. But other parts of the value chain offer better prospects.
For example, SolarEdge and Enphase make power inverters, which convert a solar panel’s power to alternating current and adjust performance to maximize output. Their Nasdaq-listed shares have returned 179% and 444% respectively during the past year and now trade for 72 and 93 times forward earnings. That is a lot of growth priced in. However, the technologies are patent-protected and could also be central to managing a smart home’s power between electric vehicles, solar panels, batteries and the like—a potentially vast market.
Developers are another option. They bid for, build and run solar farms. While installing the panels isn’t complex, experience is valuable when pricing bids and navigating the permitting process, and scale is crucial to sourcing panels effectively.
NextEra Energy, Enel and Iberdrola have built huge renewable-power farms as part of wider utility businesses and have ambitious rollout plans for solar and wind. Their shares have given investors total returns of between 16% and 28% over a year, and now change hands for between 15 and 32 times forward earnings. Barclays utilities analyst Dominic Nash credits part of the rise to general growth investors coming into the sector for the first time.
Then there are U.S. residential developers, which offer homeowners rooftop solar-panels paired with battery storage. The products provide added reliability, and monthly payments for the cost of batteries and solar panels that are often lower than existing utility bills. “It’s a pretty easy sale,” says Stephen Byrd, an analyst at Morgan Stanley.
Shares in SunPower and Sunrun, two such developers, trade at Tesla-type multiples, 118 times and 360 times forward earnings respectively. Revenues will grow—U.S. solar penetration will rise from 3% now to 14% by 2030, says Mr. Byrd—but margins will also come under pressure once installers compete head-to-head rather than with incumbent utilities.
Investors need to choose carefully as the stock-market solar coaster speeds up again. The general direction of travel may be up, but it likely still has plenty of twists and turns in store.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
What a quarter-million dollars gets you in the western capital.
Alexandre de Betak and his wife are focusing on their most personal project yet.
CIOs can take steps now to reduce risks associated with today’s IT landscape
3 min
As tech leaders race to bring Windows systems back online after Friday’s software update by cybersecurity company CrowdStrike crashed around 8.5 million machines worldwide, experts share with CIO Journal their takeaways for preparing for the next major information technology outage.
IT leaders should hold vendors deeply integrated within IT systems, such as CrowdStrike , to a “very high standard” of development, release quality and assurance, said Neil MacDonald , a Gartner vice president.
“Any security vendor has a responsibility to do extensive regression testing on all versions of Windows before an update is rolled out,” he said.
That involves asking existing vendors to explain how they write software, what testing they do and whether customers may choose how quickly to roll out an update.
“Incidents like this remind all of us in the CIO community of the importance of ensuring availability, reliability and security by prioritizing guardrails such as deployment and testing procedures and practices,” said Amy Farrow, chief information officer of IT automation and security company Infoblox.
While automatically accepting software updates has become the norm—and a recommended security practice—the CrowdStrike outage is a reminder to take a pause, some CIOs said.
“We still should be doing the full testing of packages and upgrades and new features,” said Paul Davis, a field chief information security officer at software development platform maker JFrog . undefined undefined Though it’s not feasible to test every update, especially for as many as hundreds of software vendors, Davis said he makes it a priority to test software patches according to their potential severity and size.
Automation, and maybe even artificial intelligence-based IT tools, can help.
“Humans are not very good at catching errors in thousands of lines of code,” said Jack Hidary, chief executive of AI and quantum company SandboxAQ. “We need AI trained to look for the interdependence of new software updates with the existing stack of software.”
An incident rendering Windows computers unusable is similar to a natural disaster with systems knocked offline, said Gartner’s MacDonald. That’s why businesses should consider natural disaster recovery plans for maintaining the resiliency of their operations.
One way to do that is to set up a “clean room,” or an environment isolated from other systems, to use to bring critical systems back online, according to Chirag Mehta, a cybersecurity analyst at Constellation Research.
Businesses should also hold tabletop exercises to simulate risk scenarios, including IT outages and potential cyber threats, Mehta said.
Companies that back up data regularly were likely less impacted by the CrowdStrike outage, according to Victor Zyamzin, chief business officer of security company Qrator Labs. “Another suggestion for companies, and we’ve been saying that again and again for decades, is that you should have some backup procedure applied, running and regularly tested,” he said.
For any vendor with a significant impact on company operations , MacDonald said companies can review their contracts and look for clauses indicating the vendors must provide reliable and stable software.
“That’s where you may have an advantage to say, if an update causes an outage, is there a clause in the contract that would cover that?” he said.
If it doesn’t, tech leaders can aim to negotiate a discount serving as a form of compensation at renewal time, MacDonald added.
The outage also highlights the importance of insurance in providing companies with bottom-line protection against cyber risks, said Peter Halprin, a partner with law firm Haynes Boone focused on cyber insurance.
This coverage can include protection against business income losses, such as those associated with an outage, whether caused by the insured company or a service provider, Halprin said.
The CrowdStrike update affected only devices running Microsoft Windows-based systems , prompting fresh questions over whether enterprises should rely on Windows computers.
CrowdStrike runs on Windows devices through access to the kernel, the part of an operating system containing a computer’s core functions. That’s not the same for Apple ’s Mac operating system and Linux, which don’t allow the same level of access, said Mehta.
Some businesses have converted to Chromebooks , simple laptops developed by Alphabet -owned Google that run on the Chrome operating system . “Not all of them require deeper access to things,” Mehta said. “What are you doing on your laptop that actually requires Windows?”
