UBS analyst William Grippin has initiated coverage of Sunnova Energy, a residential solar company, with a buy rating and a $16 price target. This suggests that shares could potentially increase by 52.8% from their closing price on Friday.

Reasons to Invest in Sunnova Energy

Grippin believes that Sunnova Energy is well-positioned to capture market share due to the growing demand for third-party-owned (TPO) residential solar systems. These systems benefit from favorable tax treatment under the Inflation Reduction Act.

Despite Sunnova’s shares struggling over the past year and experiencing a 50% decline, Grippin sees this as a buying opportunity for investors. The losses were primarily driven by concerns about market growth and rising interest rates.

Key Catalysts for Sunnova Energy

Grippin highlights two key catalysts for Sunnova Energy’s potential growth. Firstly, the ongoing release of state-level solar approvals data will provide valuable insights. Secondly, the recognition of investment tax credits (ITC) on new installations may further boost the company’s prospects, potentially in the second half of 2023.

The federal government’s provision of ITC enables solar energy adoption by offsetting upfront installation costs. UBS estimates that Sunnova Energy will capture 40%-50% effective ITC on approximately 25% of its installations. The company is expected to maintain its position as one of the top three residential solar players and gain market share from regional installers focused on cash and loans.

Potential Growth Challenges

The weak residential solar outlook for the second half of this year, as outlined during Sunnova Energy’s second-quarter earnings calls, poses a risk to the firm’s growth expectations. Grippin anticipates a trough in year-over-year solar growth in the first half of 2024. However, looking at a 12-month forward view, a recovery in the residential solar market seems likely by the second half of 2024, especially if consumer funding costs decrease.

Market Response

Following the news, Sunnova Energy shares rose by 3% in premarket trading.

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