Goldman predicts that clean hydrogen will be a trillion dollar market. Here’s how to play it.
In the race to reduce global carbon emissions to zero, clean hydrogen is increasingly expected to be the winner. Hydrogen is the most abundant element in the universe, and has long been seen as part of the solution as the world shifts away from fossil fuels. But the road to its use is riddled with obstacles. Chief among them was its cost, but new ways of producing hydrogen are less expensive, and this is a game changer that could drive hydrogen stocks in the years to come. “We believe clean hydrogen has emerged as a cornerstone of any ambitious net worth pathway, helping to decarbonize [circa] 15% of global [green house gas] emissions across sectors,” Goldman Sachs analysts wrote in a recent research report on the subject. The company estimates that the total addressable market for hydrogen generation could reach more than $1 trillion by 2050. To reach net zero by that date, Goldman expects $5 trillion should be invested in the hydrogen supply chain.Goldman said hydrogen is versatile and generates a lot of energy, which means it can be used for things like moving heavy vehicles and heating furnaces to make steel that can’t be easily accomplished by other fuel sources.It will represent industrial applications, which It accounts for most of the hydrogen demand today, just 15% of all hydrogen demand by 2050, according to a November report on the industry published by the Hydrogen Council in collaboration with McKinsey & Co. The strongest use of hydrogen by 2050 is expected to be in mobility, including In heavy trucking, aviation and container ships.Hydrogen can also be used for long-term high-capacity energy storage, which is key to increasing reliance on solar energy. and renewable wind energy. What has changed Although hydrogen is abundant, it usually binds to other molecules and chemical bonds must be broken to extract the hydrogen. In the vast majority of cases, this has been achieved using fossil fuels such as natural gas, which can contribute to climate change. “Green” and “blue” hydrogen change the equation, Goldman said. Green hydrogen is generated by extracting the molecule via electrolysis of water where the electricity used is powered by renewable and low carbon energy, resulting in zero emissions. Goldman said that with renewable energy costs falling, green hydrogen is becoming a better decarbonization solution. The company expects to spend more than $2 trillion purchasing hydrogen electrolysis equipment that will be required to reach net zero. On the other hand, blue hydrogen refers to natural gas-based hydrogen supported by carbon capture, utilization and storage technologies. These technologies have been “largely untapped” in the past decade, according to the report, paving the way for further growth and innovation in technologies, which are also vital to a low-carbon, low-cost transition to clean hydrogen. “We see the potential for this industry to quadruple by the end of the decade,” said the report on blue hydrogen. How to play it Buy-rated First Solar is among the major players in green hydrogen generation, Goldman said. Goldman wasn’t the only one in love with First Solar, the largest developer of solar panels in the United States. On FactSet, the stock has an average rating of Overweight with a price target of $181.35. That indicates a gain of more than 3% from where it closed on Thursday. In the past year, shares are up more than 131%. Goldman said First Solar will benefit from manufacturing credits from the Inflation Act and will likely see its profit margins improve. First Solar’s FSLR 1Y mountain stock is up more than 120% in the past year. The IRA includes a hydrogen production tax deduction of a maximum of $3 per kilogram if the hydrogen is produced without emitting any carbon emissions. Experts say the tax exemption makes nuclear hydrogen highly competitive with the fossil fuels produced, since companies can look forward to producing clean hydrogen without losing any money. The US Department of Energy aims to eventually bring the cost of clean hydrogen down to $1 per kilogram within a decade. Currently, production using renewable energy can cost as little as $5 per kilogram. Fuel cell manufacturer Plug Power has been in the clean energy industry for decades, but its focus is increasingly on hydrogen production. The company is rated overdue on FactSet with a price target of $26.80, which indicates shares could gain as much as 74% from Thursday’s close. The stock is up 22% this month. Shares of PLUG 3M mountain Plug Power are up more than 34% so far this year, but the stock has lost most of the gains it has seen in the past six months. In the current recessionary environment, Goldman Sachs expects Baker Hughes shares to be a defensive play. The company may end up operating in several segments of the hydrogen supply chain, including storage. Goldman analyst Neil Mehta said its exposure to LNG and continued expansion of industrial energy technologies are strengths. The company is rated overvalued with a price target of $35.92, according to FactSet. Its share price has risen about 15% over the past year, driven by higher energy prices. If the stock reaches its average price target, it will have gained 13% from its Thursday close. While Baker Hughes missed Wall Street’s earnings forecast for the fourth quarter, the company is optimistic for the year ahead. It restructured its business last year into two divisions, one for oilfield equipment and services and the other for industry and energy technology. The oil-focused division posted a 12% increase in sales year-over-year to $3.6 billion, while the energy-focused division saw revenue increase 1% from the prior year to $2.3 billion. “Given the sharp performance, the risk/reward looks particularly compelling for BKR from current levels as we move into 2023,” Goldman analyst Neil Mehta said in a note earlier this month about the stock, which is rated a Buy. Goldman has identified Air Products & Chemicals and Linde as complementary players in the clean hydrogen supply chain. It has a buy rating on both stocks. Analyst Davey Fisher said Air Products “is leaning towards the narrative that hydrogen will become a major clean energy source in the coming years.” He said the company has committed $10 billion in equity to its efforts in space. As the largest industrial gas company, Linde has a “significant uptick” in both blue and green hydrogen, Fischer said. However, the company is wary of putting major investments behind it unless it has already booked customers, he said. Other US stocks mentioned include Cummins, NextEra and 3M.