Solar energy stocks had another rough week as interest rate fears and new investor lawsuits came to light.
According to data provided by S&P Global Market Intelligence, SunPower (SPWR +0.00%) was down by as much as 13.2% this week, Sunrun (RUN +6.97%) dropped by as much as 25.4%, and Sunnova Energy (NOVA +0.00%) was off by 19.1% at its low point. Those stocks closed the week down by 6.6%, 21.3%, and 16.4%, respectively.
NASDAQ: RUN
Key Data Points
Interest rates plague solar stocks
The biggest factor hitting solar energy stocks this week was the rise in interest rates. Over the past month, the 1-year U.S. Treasury bond rate has increased from 4.23% to 4.31%. That rise in the market rate was driven by a higher-than-expected inflation reading for February, which made investors think the Federal Reserve will keep its benchmark federal funds rate higher for longer than previously expected.
Coming into 2024, most investors thought the Federal Reserve would make multiple cuts to that key interest rate this year, but the start of those cuts has been delayed because inflation remains higher than the central bank's target. The Consumer Price Index rose by 3.2% year over year in February.
Interest rates are critical to solar companies because solar projects are financed over decades. The higher the interest rates on the funds they use are, the lower the present value of the projects' long-term cash flows.
Sunnova and Sunrun are more heavily impacted because they finance all of their solar installations. SunPower offers cash and loan sales along with leases, but has seen increased demand for leases recently.
Sunnova's business is under fire
The other big news item of the week was that Sunnova faces potential lawsuits after a Congressional probe found "troubling sales practices." Lawsuits aren't unusual and the solar industry has always had issues with pressure selling to clients who may not understand the long-term commitment a solar power system contract entails.
This news followed Sunnova's announcement of an open-ended stock sale program that could be used to finance installations, but could also be dilutive to shareholders.
Solar energy companies have a lot of questions to answer
The bottom line is that investors don't like uncertainty, and solar companies are offering a lot of uncertainty. Demand for their wares is uncertain, interest rates are uncertain, and we don't even know what the mix of solar and energy storage will be long term.
Seen through that lens, it makes sense the market sold off solar energy stocks this week. But if SunPower, Sunrun, and Sunnova can get over their short-term liquidity challenges, their shares could be good values for long-term investors. Subsidies for solar installations are getting more attractive, energy storage is more economical and will add revenue, and costs are expected to come down in 2024.
Eventually, there will be tailwinds behind solar companies because this is an industry that's going to see growing demand as utility rates rise. But the path from here to there won't be a straight line, and that's what investors are worried about.
Based on their fourth-quarter earnings results and conference calls, solar companies are expecting demand to pick up in the second half of 2024, which would be connected to the contracts they're signing right now. But it's taking some time for demand to adjust to the changes put in place with the 2023 rollout of California's Net Energy Metering 3.0 policy -- and California is where most of the industry's U.S. revenue is generated. I think there's upside, but this may still not be the bottom for these stocks.
