Shares of Aehr Test Systems (AEHR 1.50%), ChargePoint Holdings (CHPT 0.79%), and Plug Power (PLUG 1.26%) were down severely in Wednesday trading, retreating 11.7%, 11.1%, and 10.2%, respectively.
All of these renewable energy stocks have a few things in common, and one of them is high sensitivity to interest rates, with some announcements in the past week making them even more sensitive to rates.
Investors appear to be selling these types of stocks over fear of rapidly rising long-term Treasury bond yields, which surged yet again today, reaching levels not seen since 2006.
Surging bond yields threaten Aehr's valuation, and ChargePoint's and Plug's existence
Today, the 10-year Treasury bond yield rose to nearly 4.93% at its high, while the 30-year bond rose above 5%, a potentially psychologically important threshold and the highest yield since 2006.
While it is not a certainty what is causing the rise in yields, it could be one or all of several factors: a strengthening economy and worries about continued above-target inflation, worries about the sustainability of the government's fiscal deficits, or a mere supply-demand imbalance stemming from the Fed's quantitative tightening -- as well as sales or lack of buying of U.S. Treasuries by foreign governments.
Whatever the cause, what does this have to do with renewable energy? Not anything directly, but the growth of renewables requires capital investment, while at the same time, many renewable energy stocks trade at high valuations, reflecting the anticipation of continued growth.
Aehr Test Systems is actually the only profitable company out of these three, but it trades at a high valuation, especially after more than doubling at one point this year. Even after today's plunge, the stock trades at over 50 times earnings and is still up 62% on the year.
But the further out into the future that surging long-term yields are, the more they discount the value of earnings -- which, all else being equal, leads to a lower present value for those future profits.
And matters weren't helped by today's disclosure that one of Aehr's directors sold nearly 1,000 shares of stock. While it wasn't that much money (just about $36,000), it was still an incremental negative for Aehr's stock today.
But things are even worse for ChargePoint and Plug Power, which are unprofitable, burning cash, and will likely need to raise money at some point to continue operations. Surging bond yields make that capital raise much more expensive and difficult.
Last week, ChargePoint fell after disclosing a new $175 million at-the-market facility, which would allow the company to sell stock on the public markets to raise more money. But since that announcement, the stock has plunged, making any money raise more and more dilutive.
Plug Power, which is undertaking an ambitious build-out of hydrogen infrastructure, is in a better place than ChargePoint, in terms of its balance sheet, with about $1 billion in net cash. However, its plans are also way more capital-intensive, with Plug burning through almost $1 billion in cash in just the first six months of 2023 alone!
Expect continued pressure on these stocks
Investors in high-growth stocks can probably expect a continued pressure on valuations, even if a company is showing strong growth, as Aehr is.
However, for those invested in loss-making stocks and/or with questionable balance sheets, the situation is much more precarious. It will not matter how promising a company's future is unless it can raise the money required to get to self-sustaining profitability. Moreover, the long-term energy transition might proceed in fits and starts. This week, a Wall Street Journal article reported on a notable slowdown in electric vehicle adoption, which affects Aehr and ChargePoint.
That's why it's best for investors to stick with profitable stocks at reasonable valuations, until this bond-yield scare calms down. But that could be awhile, as U.S. deficits won't be solved overnight.
