All Aboard the Stock-Market Solar Coaster

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.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

All Aboard the Stock-Market Solar Coaster

Much of the climb in solar stocks looks justified by growth prospects, but buyers may still be in for a bumpy ride

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021