The renewable energy market is experiencing a challenging period due to high interest rates, low power prices, and uncertainty surrounding U.S. climate policy, significantly impacting solar stocks. Investors are increasingly avoiding solar investments.
According to Mercom Capital Group, solar companies raised $12.2 billion in debt financing in the first half of 2024, marking the highest in a decade and a 53% year-over-year increase.
Solar companies are particularly sensitive to high interest rates; a 5% hike in interest rates can raise the levelized cost of electricity (LCOE) for solar projects by 33%, compared to a slight increase for natural gas plants.
Policy Uncertainty
The future of U.S. climate policy remains unclear, further weighing down the renewable energy sector.
Last month, the U.S. Supreme Court’s decision to overturn the 40-year-old Chevron doctrine has introduced legal and regulatory uncertainty for regulated utilities.
Following the ruling, judges must now interpret statutes independently instead of deferring to agencies like the Environmental Protection Agency (EPA).
Moody’s highlighted that “the lack of clarity on future EPA mandates increases uncertainty and complicates the decision-making process for power companies regarding their optimal and cost-effective generation mix.” They also noted that the burden of statute interpretation might overwhelm lower courts, causing delays and inconsistencies.
Volatility in the Solar Sector
The solar sector has become highly volatile. The Invesco Solar ETF (NYSEARCA) has dropped nearly 20% year-to-date, while the Oil & Gas benchmark, Energy Select Sector SPDR Fund (NYSEARCA), gained 9.5%, and the S&P 500 returned 14.6% over the same period.
Recent developments have been notably bearish. For instance, SunPower (NASDAQ) fell nearly 30% after announcing it would cease signing new agreements and stop supporting installation services for in-transit or already delivered shipments.
Mizuho Securities downgraded SunPower to Underperform from Neutral with a $0.50 price target, down from $4, citing the company’s halting of lease and PPA installations due to likely balance sheet constraints. SPWR has plummeted 79.4% year-to-date.
Challenges at SolarEdge Technologies
SolarEdge Technologies (NASDAQ) dropped nearly 20% after announcing a cut of 400 employees due to an inventory backlog and declining revenues. Despite recovering 10.5% in Monday’s session, SEDG is still down 73.1% year-to-date.
Market Optimism
Despite the challenges, there is a silver lining. Raymond James analyst Pavel Molchanov noted that SunPower’s issues do not reflect the underlying demand for U.S. residential solar. He suggested that other companies would fill the demand gap left by SunPower, emphasizing the solar value chain’s adaptability.
Additionally, market optimism is growing regarding potential interest rate cuts by the Federal Reserve. Analysts at Citi predict the Fed could reduce interest rates by 200 basis points in its next eight meetings through the summer of 2025, driven by signs of a slowing economy and rising unemployment.
TD Cowen analyst Jeff Osborne anticipates “a perfect storm brewing” with rate cuts, increased electricity prices, and stronger consumer spending in 2025.
Top 3 Solar Picks for Q2 2024 Earnings Season
First Solar Inc.
- Market Cap: $23.7B
- 12-Month Returns: 11.8%
First Solar Inc. (NASDAQ) is scheduled to report earnings on July 30, 2024, after market close. According to Zacks Investment Research, the consensus EPS forecast for the quarter is $2.67, up from $1.85 in the same quarter last year.
First Solar is a prominent name in the U.S. and global solar markets, with a 12-month average price target of $286.33, suggesting nearly 30% upside potential. Deutsche Bank recently identified FSLR as one of the few actionable names in the sector, highlighting its strong growth prospects in the U.S.
Nextracker Inc.
- Market Cap: $6.9B
- 12-Month Returns: 19.0%
Nextracker Inc. (NASDAQ) provides solar tracker and software solutions for utility-scale companies and is set to announce Q1 Fiscal 2025 results on August 1, 2024. The company reported Q4 adjusted EPS of $0.96, beating estimates by $0.27, and revenue of $736.52M, surpassing expectations by $52.53M.
Nextracker recorded a $4B backlog in FY2024 and guided full-year 2025 net sales between $2.8B and $2.9B, with adjusted diluted EPS of $2.89 to $3.09.
Sunrun Inc.
- Market Cap: $3.8B
- 12-Month Returns: -12.9%
Sunrun Inc. (NASDAQ), a leading U.S. residential solar energy systems company, is expected to report earnings on August 6, 2024, after market close.
The consensus EPS forecast for the quarter is -$0.33, a sharp decline from $0.25 a year ago. Despite challenges from NEM 3.0, the residential solar sector’s long-term momentum remains strong. Sunrun’s shares have a consensus Strong Buy rating, with a price target of $19.93, representing a 10.38% change from the current price.