What happened
Solar stocks are getting a ton of love right now. Shares of solar panel installation and services companies SunPower (SPWR -2.17%) and Sunrun (RUN -6.78%), and solar panel and energy storage equipment maker SolarEdge (SEDG -3.93%), gained 20%, 28%, and 14% respectively on Nov. 10. It was a great day for many stocks, with the S&P 500 closing up 5.4%, but clearly investors continue to favor renewable energy stocks.
So what
All three of these companies have reported quarterly results in the past week. Sunrun reported results on Nov. 2, with shares soaring on the 3rd after it reported a 21% increase in customers, 17% higher megawatts of solar capacity installed, and 23% higher recurring revenue from its customers.
SunPower reported similarly impressive results on Nov. 7, with 25% customer growth, a 14% increase in revenue, and strong guidance for the rest of the year. Looking further out, its new partnership with General Motors and expanded deal with Dream Finders Homes add to its already impressive backlog and strong prospects.
SolarEdge is the most recent to report, announcing its third quarter on Nov. 8. Its results also may be the most impressive, with revenue up 59% and plans to continue expanding capacity as global demand for solar ramps ever higher. The company did miss expectations on the bottom line, but showed some modest improvement in gross margin on its solar products, its largest and most profitable business at this stage.
Today's surge is a continuation of those heightened expectations on the back of solid quarterly results. Today's inflation report was much better than expected, with inflation below 8%, a sequential improvement and a step in the direction that could help avoid recession if the Fed feels it necessary to continue raising rates, pressuring the economy into slowing down.
Now what
In addition to today's positive read on inflation that could lead to the Fed taking its boot off the economy's neck, the Inflation Reduction Act will make solar, energy storage, and some electric vehicles more affordable. With persistently high energy prices, this could be a boost to all three of these companies in the years ahead.
However, there's a lot of work to be done before inflation returns to levels the Fed wants to see. The recent gains post-earnings could evaporate if we get bad news on those fronts in the near term.
Investors should also be cautious with solar stocks. SolarEdge has been an enormous winner, but in part because investors have proven willing to increasingly pay a higher and higher valuation for its stock, even as its margin profile has worsened. For Sunrun and SunPower, their prospects are solid, but investors need to acknowledge that demand could prove very cyclical. That could result in big swings in sales growth and profits to losses when the cycle turns.
There's little doubt that solar power and energy storage will continue to be disruptive and grow significantly. It's less clear that investors will profit from that growth. Between SolarEdge's extremely high valuation, and concerns about how their business models will hold up in the higher-rate environment for SunPower and Sunrun, investors may want to consider other places to invest right now.
