Challenges Facing Solar Stocks

Solar stocks have experienced significant gains this year, driven by optimism surrounding government subsidies for clean energy and expectations of future lower interest rates. The Invesco Solar ETF (TAN) has risen by 15% since the beginning of the year. Notably, First Solar (FSLR), the leading manufacturer of solar modules in the United States, has emerged as one of the biggest winners in this industry. The company's stock has seen an impressive 126% surge in the past year, with an additional 18% increase since the start of 2023.

Despite these remarkable achievements, Bank of America analyst Julien Dumoulin-Smith believes that First Solar may now have limited potential for further growth. Consequently, he downgraded the stock to a Neutral rating and set a price target of $195. In response to this announcement, shares of First Solar dropped by 3% on Thursday, reaching a value of $174.70. ’s previously recognized First Solar as a major beneficiary of the rising prominence of renewable energy in the United States.

First Solar stands to gain substantial tax benefits from the Inflation Reduction Act (IRA), a legislation passed by Congress in the previous year. This act provides significant tax credits for solar manufacturers, and Dumoulin-Smith predicts that First Solar could receive more than $8 billion worth of production tax credits. Additionally, the company has benefited from U.S. laws prohibiting the importation of solar panels manufactured with forced labor, particularly those originating from China. This trade restriction has further fueled the demand for First Solar's products.

However, it is important to recognize that some of these favorable conditions may be reaching their peak, as solar prices are currently experiencing a decline globally. This trend suggests an increase in price competition for First Solar. Consequently, potential investors may have fewer incentives to purchase shares at current levels.

Dumoulin-Smith advises investors to explore alternative options within the solar industry. While acknowledging First Solar's unique exposure to IRA tax credits and its favorable positioning as one of the few profitable large-scale cleantech companies, Dumoulin-Smith suggests considering companies such as Array Technologies (ARRY). Array specializes in solar tracking systems that enable solar panels to follow the path of the sun, enhancing their efficiency and power generation capabilities.