This Solar Stock Could Double In Value, But Morgan Stanley Warns Of A Bumpy Ride

For investors willing to accept some temporary volatility in the near future, Morgan Stanley believes Sunnova is worth buying - since its share price has the potential to more than double.

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The price target of $35 offered by Andrew Percoco, a leading analyst with a firm focus on the stock, implies upside of 124.1% from Friday's closing price of $27. He initiated coverage at overweight with an upside of $10.

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It is our opinion that NOVA offers a unique opportunity to contribute to long-term growth prospects in a sector with little penetration, albeit a field with a growing offering of products and services, at a discount valuation as it trades at the moment," Percoco said in a note to clients on Monday.

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As a residential rooftop solar installer, the company was ranked third in the U.S. behind Sunrun Inc., First Solar Inc., and SunPower. Due to the relatively small number of solar roofs in the U.S., Percoco predicted the market would continue to grow in the coming years. In addition, he pointed out that the cost gap between solar and utility power will continue to widen, making solar power more attractive in the future. The number of installations is expected to increase by about 15% between 2022 and 2035, according to Percoco.

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As a result of the company's efforts, Sunnova has expanded from simply solar to a product called the Sunnova Adaptive Home, which includes solar, storage, electric vehicle charging, as well as standby generators as well. Despite being dubbed the "next generation" offering, as Percoco referred to it, this "next generation" offering will become increasingly popular as customers seek out ways to fully reduce their reliance on the grid.

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Additionally, he said Sunnova's high-margin service agreements for rooftop solar assets could result in faster growth of EBITDA, since these agreements are based on third-party service agreements. The stock is also expected to rise in price in the future due to the fact that Percoco said it is trading below the value of its contracts, valued at $2.07 billion, or $17 per share.

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However, Percoco indicated that the stock may not have an easy ride upwards in the near future. As Sunnova has only 25% of its customers in California, he said that even though the company has relatively limited business in California, the Solar Billing Plan could still have an impact on Sunnova. A change in capital costs or a reduction in the availability of tax equity as a result of the bank crisis could also result in near-term volatility for shares, he said.

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It is estimated that the shares lost 13.3% from the beginning of 2023 through the end of the week, the premarket gains 1.3%.