What happened
Shares of solar energy stocks have been cratering this week in the wake of several first-quarter earnings releases and the Federal Reserve's latest interest rate hike. However, the solar industry continues to grow, so there are competing forces at work here.
According to data provided by S&P Global Market Intelligence, as of 10 a.m. ET, shares of SunPower (SPWR -1.02%) had dropped by 16.6% since the market closed on Friday, Sunrun (RUN -2.43%) was down 22.6%, Sunnova Energy (NOVA 0.26%) has dropped 16.9%, and Array Technologies (ARRY 2.43%) was down 11.5%. It doesn't seem that any part of the solar value chain was spared in the sell-off.
Image source: Getty Images.
So what
SunPower and Sunrun released earnings this week, and the results weren't exactly what investors were expecting. Margins are under pressure due to higher interest rates, and for SunPower, there were extra costs associated with a surge in sales in California ahead of a net metering rules change. Sunnova reported similar pressures when it reported earnings last month.
What we heard consistently from management teams was that they're expecting the rest of the year to be stronger. Rising utility rates are making solar more economical in much of the country, and energy storage systems are being included in more installations. But the market will take some time to play out.
Another major factor impacting solar stocks was rising interest rates. The Federal Reserve bumped the benchmark federal funds rate up by another 25 basis points this week, bringing it to 5%. Each of the Fed's rate hikes since the start of 2022 has made the cost of borrowing money to install a solar power system incrementally more expensive. At the same time, the share prices of many regional banks that have helped fund solar installations slumped this week. In the sector, the impact of rising interest rates may hit utility-scale projects hardest, and because Array Technologies is a component supplier for utility-scale projects, there's reason to be cautious about its prospects ahead of its earnings report next week.
The general concern is that financing costs will go up sharply over the next few quarters. If that happens, it will hurt demand because only a small fraction of buyers pay cash for solar installations, which can easily exceed $30,000.
Now what
Solar stocks are generally volatile, and small changes in fossil fuel commodity prices or interest rates can send them sharply higher or lower. In this case, I think what we're seeing is an early phase of pressure coming from higher interest rates. But companies will adjust their cost structures and financing to adapt.
The long-term trend is still that solar energy is growing, and the U.S. specifically has made important policy changes to promote more solar installations. But the impacts of that federal support for green energy could take a while to flow through the system and result in rising earnings for solar companies. Until we see their margins improve, I wouldn't be surprised if investors remain cautious about solar energy stocks.
