Please ensure Javascript is enabled for purposes of website accessibility

Why Solar Energy Stocks Are Dropping Right Now

By Travis Hoium – Updated Aug 23, 2021 at 9:45AM

Key Points

  • Fear of rising interest rates could hurt solar development.
  • Continued tension with China hasn't been good for solar.
  • On the plus side, the U.S. seems committed to increasing its solar investment and the global investment is booming.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Solar stocks are falling again, but there are bright spots on the horizon.

Solar energy stocks have had a rough two-week stretch on the market, with companies like JinkoSolar (JKS -0.69%) losing nearly one-third of its value and Canadian Solar (CSIQ -3.40%) dropping over 20%. And Maxeon Solar Technologies (MAXN 1.22%), SunPower (SPWR 0.54%), and Enphase Energy (ENPH 1.15%) have all fallen around 10%. 

What's causing the drop and is a recovery near? With the global economy coming out of the pandemic, the answer is complicated. 

JKS Chart

JKS data by YCharts

Costs are under pressure

One of the factors that hurt solar stocks over the last few weeks was news that higher costs are hurting manufacturing profits. Polysilicon prices are high as the global supply for polysilicon remains tight. Transportation costs were also pointed to as a headwind by Canadian Solar in its recent earnings report. 

The trends can be seen in Canadian Solar's gross margin and net income trends below. You can see that gross margin is falling steadily over time and that's now bringing the company close to a net loss. 

CSIQ Gross Profit Margin (Quarterly) Chart

CSIQ Gross Profit Margin (Quarterly) data by YCharts

Higher costs for polysilicon and transportation are largely out of the control of any solar company, so it could be a while before costs come down, and there's little ability for anyone in manufacturing to raise prices. 

Higher interest rates are coming... someday

Solar projects are highly dependent on low interest rates for financing, so it should be no surprise that as investor fears about rising rates grow, solar stocks will fall. This week, we found out the Federal Reserve is prepared to "taper," or reduce the purchase of financial assets, later this year. That could push interest rates higher and make solar projects less financially viable. 

This often happens in the solar industry. Falling rates push stocks higher, while rising rates push stocks lower. Over the last few weeks, these stocks have just been on the wrong side of interest rates. 

Solar farm in a grassy field.

Image source: Getty Images.

The China fear

It can't be overlooked that fear of tariffs or other trade restrictions on goods coming from China has impacted stocks as well. The Biden administration has banned solar materials from Xinjiang, China, and has seen pressure to add tariffs on more solar imports. 

We can't overlook recent moves by the Chinese government to restrict everything from tech companies to education operators, which it deems important to the national interest. Solar companies within China have always operated with the backing of government banks and local territories, but there is a risk that support reverses or the terms of China's support of solar manufacturing and installations changes. 

Investors are rightfully fearful of investing in China right now, and JinkoSolar, Canadian Solar, and Maxeon have a lot riding on their Chinese operations. 

There is still positive news for solar companies

There are a number of tailwinds behind the solar industry that could overcome some of the challenges outlined above. One is that there's a more solar friendly administration in the White House right now, recently proposing $300 billion in tax cuts for clean energy, including solar. And President Biden wants to invest in new jobs in the U.S. as well as innovation to cut costs further. 

Tax incentives are helping drive billions of dollars of investment in solar and adjacent technologies like energy storage. According to IB Centre, $80 billion will be invested in solar energy globally in 2021. 

Globally, investment in solar developments is growing in China, India, Japan, and even the Middle East. In most cases, solar is winning because it's the lowest-cost energy option, beating coal, nuclear, and natural gas. As long as those trends continue, the industry will continue to grow. But as we've seen in the last few weeks, it'll be an up-and-down ride in the meantime. 

Travis Hoium owns shares of Maxeon Solar Technologies, Ltd. and SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Canadian Solar Stock Quote
Canadian Solar
CSIQ
$35.75 (-3.40%) $-1.26
SunPower Stock Quote
SunPower
SPWR
$24.13 (0.54%) $0.13
Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
ENPH
$319.42 (1.15%) $3.64
JinkoSolar Holding Company Stock Quote
JinkoSolar Holding Company
JKS
$47.81 (-0.69%) $0.33
Maxeon Solar Technologies, Ltd. Stock Quote
Maxeon Solar Technologies, Ltd.
MAXN
$24.05 (1.22%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.