Bad news that led to a massive sell-off in shares of solar power inverter manufacturer SolarEdge (SEDG 2.81%) also burned investors in related solar power stocks Friday. Through 11:35 a.m., solar power installers Sunrun (RUN 5.97%), Sunnova Energy International (NOVA 8.70%), and SunPower (SPWR 5.85%) were down 9.4%, 11.1%, and 13.4%, respectively.
The stocks' plunges all started when SolarEdge released preliminary numbers for the third quarter on Thursday evening, warning that "substantial unexpected cancellations and pushouts of existing backlog from our European distributors" will cause the company to miss its prior sales guidance by as much as $200 million -- a miss as big as 22% -- with weak gross margins and an operating loss to boot.
Why SolarEdge's bad news is bad news for Sunrun, Sunnova, and SunPower, too
This is miserable news for SolarEdge investors, no doubt, exacerbating losses in the stock earlier in the year, and returning SolarEdge stock to price levels last seen in the early months of the pandemic. But things could get messy for Sunrun, Sunnova, and SunPower, too.
All three of these companies, you see, are deeply involved in the residential solar business. And according to SolarEdge, the problem with its order cancellations and "pushouts" basically stemmed from the fact that installation rates of solar power systems were "slower than expected." This has caused an inventory glut for SolarEdge, and resultant weak sales -- but it also implies weak sales of solar panels for Sunrun, Sunnova, and SunPower -- companies that would be expected to buy inverters for the panels they install.
Wall Street analysts are already starting to pick up on the implications.
While everyone else on Wall Street was busy downgrading SolarEdge, JPMorgan rushed out price target cuts on all three solar installers, while Deutsche Bank went ahead and downgraded their stocks as well -- cutting Sunrun and Sunnova to hold, and tagging SunPower with a sell rating, as TheFly.com reported. On Friday morning, French bank BNP Paribas took a more nuanced approach, initiating coverage of Sunrun at outperform and Sunnova at neutral -- but agreeing that SunPower is a sell.
Should you buy, sell, or hold Sunrun, Sunnova, and SunPower?
Mind you, at this point, what has been dragging down the shares of the installers is all speculation -- albeit entirely logical speculation. So far, none of them have issued any earnings warnings themselves. But the bad news may not be long in coming.
Both Sunrun and SunPower are scheduled to report Q3 earnings on the morning of Nov. 1. Sunnova will report on Oct. 25. Investors selling all three of these solar stocks now, therefore, may be in "shoot first and ask questions later" mode, acting in an effort to get out before any potential bad news is made public.
Sad to say (for investors who haven't sold yet), this may well turn out to have been the right move. While we don't yet know how they did in Q3, at last report, SunPower and Sunrun were only barely profitable. Even more concerning, all three of these solar stocks have been burning cash -- $222 million in negative free cash flow for SunPower over the past 12 months, $1.6 billion at Sunnova, and a staggering $3.3 billion for Sunrun.
That already bodes poorly for their stocks, and if the news they deliver over the next two weeks is as bad as SolarEdge's report suggests it might be, then yes, selling before that news becomes public and official might well turn out to have been the right move.
