Shares of NextEra Energy Partners (NEP -3.22%) were plunging today, down 8.1% as of 2:45 p.m. ET. The company, which is a renewable energy master limited partnership, buys and holds cash-flowing solar, wind, and geothermal projects under long-term power purchase agreements (PPAs), then pays out most cash flow as distributions to unitholders.
In recent days, NextEra has been caught up in the bullish sentiment for renewable energy stocks as potential winners from AI data center-fueled electricity demand.
However, one Wall Street analyst threw cold water on that thesis on Thursday.
Not as big a beneficiary as you might think
On Thursday, JPMorgan Chase analyst Mark Strouse downgraded NextEra from neutral to sell with a $25 price target, down from the $34.55 stock price to start the day, and a bit below where NextEra Partners had been trading for most of the year.
NextEra has been thoroughly punished over the past year, as rising long-term interest rates have made financing purchases of renewable energy projects much more difficult and expensive. Given NextEra's needs to constantly tap the capital markets in order to finance projects and grow, that has caused the stock to fall, depriving the company of a potential source of funds via an equity raise. In fact, given the persistently high-rate environment, Strouse believes NEP may have to do a highly dilutive equity raise or sell other assets to finance new purchases.
If that weren't enough, it appears as though a tariff exemption of solar panel imports from China and Southeast Asian countries will be lifted starting in June, adding a 25% to 50% tariff on panels imported from these low-cost countries. In 2022, the Biden administration imposed a two-year exemption on Asian solar panels in order to spur renewable energy deployment while American manufacturing capacity ramped up. While some developers such as NextEra may have hoped for an extension, it appears the administration is sticking to the timeline, which could raise the cost of new projects.
NextEra should be able to navigate through this bumpy period, but the stock is risky
On the past quarter's conference call, NextEra Energy (NEE -0.16%) CEO John Ketchum noted the affiliate company would be able to navigate any potential cost increases, that it has inventory under contract through 2026, and that its power purchase contracts have language that protects against cost increases. Still, the potential for higher-cost panels may mean NextEra Energy Partners may have to raise more money to finance projects, even if the returns on those projects are the same.
While NextEra Energy Partners' dividend may look juicy at over 10% today, keep in mind that in order to grow, it will have to finance new projects. Its long-term PPAs paying out right now aren't going to just increase based on new electricity demand from data centers. So, the buying of NextEra Energy Partners stock specifically over the past couple weeks may have been a bit premature.
