The Solar Sector at a Crossroads: Tax Credit Changes and the Rise of TPO Models

The U.S. solar sector is undergoing a seismic shift as the expiration of the residential Investment Tax Credit (ITC) under Section 25D accelerates the transition to third-party-owned (TPO) models. With the 30% tax credit set to vanish entirely after December 31, 2025, homeowners and installers face a critical deadline to lock in savings. This policy pivot, codified in the One Big Beautiful Bill Act and reinforced by executive orders, is reshaping business models, margins, and market share for key players like Enphase Energy (ENPH), SolarEdge Technologies (SEDG), and Sunrun (RUN). For investors, the challenge lies in timing the transition and identifying which companies can thrive in a post-ITC world.

The ITC Expiration: A Catalyst for Structural Change

The 25D ITC's abrupt expiration has created a binary scenario: act by year-end 2025 or face a 30% cost increase. This has triggered a surge in last-minute installations but also exposed vulnerabilities in the residential solar ecosystem. The shift to TPO models—leases and power purchase agreements (PPAs)—is accelerating, as these structures remain eligible for the 48E tax credit until 2027. Analysts now project that over 90% of residential solar installations in 2026 will be TPO-driven, up from 50% today.

The implications for stock valuations are stark. SolarEdge and Enphase, which rely heavily on cash-sale installers, have seen their shares drop 26% and 41%, respectively, since the policy shift was announced. Sunrun, by contrast, has been upgraded to a top pick by Morgan Stanley, with its P/S ratio of 1.20 and forward P/S of 1.10 suggesting undervaluation amid its dominance in TPO.

Enphase and SolarEdge: Premium Margins vs. Market Share Pressures

Enphase Energy, known for its high-margin micro-inverter systems, faces a dual threat: declining demand for homeowner-owned systems and the rise of cheaper, TPO-friendly alternatives. Its trailing twelve-month (TTM) EBITDA of $234.55 million reflects strong profitability, but analysts warn that margins could erode as the market shifts. JP Morgan has downgraded Enphase to Neutral, slashing its price target to $37, citing exposure to the cash-sale segment.

SolarEdge, while better positioned in the TPO space (20-25% market share in leases/PPAs), struggles with profitability. Its TTM EBITDA of -$1.52 billion and a gross margin of 8.0% highlight operational challenges. RBC raised its price target to $22, betting on SolarEdge's next-gen product launches and reduced tariff impacts, but the stock remains volatile.

Sunrun: The TPO Leader's Balancing Act

Sunrun, with 19% of U.S. solar market share and a 45% stake in storage installations, is the clear beneficiary of the TPO transition. Its Q1 2025 earnings highlighted $56 million in cash generation and a record 69% storage attachment rate. However, the company's financials remain precarious: a Debt/EBITDA ratio of 77.74 and a net cash position of -$13.06 billion underscore its reliance on debt. Morgan Stanley's upgraded $16 price target hinges on Sunrun's ability to maintain cash flow amid tariff-driven hardware cost increases (3-7% in 2025).

Investment Implications: Timing, Valuation, and Adaptation

For investors, the key lies in timing the market's response to the ITC expiration. Companies like Enphase and SolarEdge may offer short-term entry points if they pivot to TPO-friendly products, but their valuations remain risky. Sunrun, despite its debt load, appears better positioned to capitalize on the 48E credit's extension, provided it can manage tariff headwinds.

Strategic stock positioning should prioritize:
1. Sunrun (RUN): A long-term bet on TPO dominance, with a focus on its AI-driven efficiency and storage growth.
2. SolarEdge (SEDG): A speculative play if its product pipeline delivers, but only after a meaningful pullback.
3. Enphase (ENPH): A high-risk, high-reward scenario for those betting on margin resilience in the premium segment.

The solar sector's crossroads present both risks and opportunities. As the ITC's expiration reshapes the landscape, investors must balance valuation metrics with the pace of industry adaptation. Those who act swiftly—prioritizing companies with TPO agility and cost resilience—will be best positioned to navigate the transition.