Solar stocks are having a lackluster year so far. There are several reasons why they witnessed a significant correction, and those headwinds aren’t going to end anytime soon.
Higher costs due to rising polysilicon prices have seriously affected solar energy companies. The pandemic has also disrupted supply chains, leading to increased transportation costs.
Additionally, investors are worried about rising interest rates, which is affecting solar stock prices. The Federal Reserve should start to shrink the purchase of financial assets later this year. This will drive up interest rates and reduce the viability of solar projects.
Additionally, utility companies in California – the largest market for solar power – have offered reduced payments for residential solar power systems.
All of these factors have collectively impacted investor sentiment, but these solar stocks are worse off than others:
- Daqo New Energy (NYSE:QD)
- Sunrun (NASDAQ:CLASSES)
- Enphase Energy (NASDAQ:ENPH)
- First solar (NASDAQ:FSLR)
- SunPower (NASDAQ:SPWR)
- Invesco Solar ETF (NYSEARCA:BRONZER)
- Renesola (NYSE:GROUND)
Solar stocks: Daqo New Energy (DQ)
Daqo New Energy is a Chinese manufacturer of polycrystalline silicon used in solar technology products. The company has had an impressive turn over the past few years and continues to be a forerunner in the evolving solar space.
However, due to the unpredictable nature of polysilicon prices, there is a considerable downside to investing in DQ stock.
Daqo’s results have been staggering lately, driven by high average selling prices (ASP). In Q2, it was nearly 231% year-over-year (YOY) revenue growth to $ 441.4 million.
What’s more, gross margins increased at 68.7% compared to 17% generated in the second quarter of 2020. In addition, its EBITDA margin has jumped considerably, from 20% in the second quarter of 2020 to over 70% this year. The massive spread in the margins indicates the volatility of polysilicon ASP, raising concerns about the high valuation of the DQ share.
SunRun has emerged as a dominant force in solar power on rooftops. Although facing stiff competition from companies such as Solar city and other upstarts, he held out.
Its financial performance has been spectacular over the past three quarters, posting double-digit revenue growth. But concerns about its economic model make the RUN title a risky bet.
Sunrun sells long term solar products such as rooftop solar loans. While they can be lucrative, they come with immense risk given the evolution of solar technology. The products can become obsolete quickly, creating dissatisfaction among customers.
In addition, Sunrun’s dependence on distributed energy rather than centralized energy could be expensive in the future.
Spending on solar equipment has fallen at a healthy pace, leaving ancillary costs to make up a significant portion of its spending. However, distributed energy has lower costs than centralized energy, which complicates matters for Sunrun.
Solar stocks: Enphase Energy (ENPH)
Enphase Energy is a California producer of home energy services for the solar photovoltaic industry. Its software-driven energy solutions cover solar production, home energy storage and other related technologies.
Although its products are attractive, Enphase will be impacted by supply constraints due to the lingering effects of the semiconductor shortage. But despite this challenge, the ENPH stock is trading at 16 times the massive futures sales.
Its results have been extraordinary in recent quarters, with triple-digit revenue growth at T2. However, capacity issues resulting from the continued shortage of chips will hurt business performance.
In addition, these constraints are likely to slow the expansion of Enphase Energy into new markets. Nonetheless, ENPH stock has picked up the pace and is now incredibly overvalued compared to its relatively weak outlook.
Premier Solar (FSLR)
First Solar is a designer and manufacturer of solar modules and power systems based in Arizona. It uses thin-film photovoltaic technology that helps to sustainably develop its solar modules.
In recent years, the company has established itself as a major player in the solar sector. However, short-term headwinds associated with supply constrictions and reduce ASP will affect the profitability and performance of FSLR stock.
First Solar recently reduced its earnings per share outlook for the year at $ 4 to $ 4.60. Its second quarter lackluster saw a 21% decline in net sales and a 56% decline in operating income on a sequential basis.
One of the main reasons for the decline First Solar profits is its far from its transition project development, sales and maintenance segments. Additionally, with the company reserving a significant portion of future sales at a fixed price, it does not charge higher ASPs to meet the higher input costs.
Solar stocks: SunPower (SPWR)
SunPower is a leading solar solution provider operating in the residential, commercial and industrial solutions segments. In recent years, it has been very successful in streamlining its operations by improving its margins.
Last year the company broke up Maxéon (NASDAQ:MAXN) and thus strengthened its balance sheet. However, its fundamentals remain weak, which limits its ability to generate significant free cash flow.
Revenue growth on a year-over-year basis was disappointing and lagged behind the industry median by a hefty margin. Sunpower revenue increases considerably slowed down in recent quarters. In addition, his third trimester orientation is $ 16.7 million behind analysts’ expectations.
EBITDA growth on a year-over-year basis has slowed even more than Sunpower’s revenue increases. With such low earning power, it’s hard to get excited about SPWR stocks.
Invesco Solar ETF (TAN)
The Invesco Solar ETF is arguably the best indicator to assess the health of the solar industry. In the last 12 months, returns were strong and outperformed S&P 500 by a large margin.
However, this ETF has lost more than 19% of its value since the beginning of the year. In contrast, the S & P 500 gained 18.5% over the same period.
The fund has slowed down considerably over the past six months due to manufacturing disruptions caused by a pandemic. Tensions between the US and China have also contributed to the decline of the ETF. The blacklist Chinese polysilicon manufacturers, in particular, pose a major threat to TAN yields.
Much of its holdings include solar companies listed in the United States, which has inflated the valuation of TAN stock at this point. With several headwinds to face, investors should avoid this ETF currently.
Solar stocks: ReneSola (SOL)
Connecticut-based ReneSola develops, operates and markets its solar energy projects in the United States and Europe. He was making solar panels and modules similar to his peers, but sold its manufacturing activity in 2017.
The company is now focused on building and selling solar farms, which are less prone to price fluctuations. However, this service is capital intensive, which affects ReneSola’s ability to generate free cash flow.
Its performance in terms of earnings has also been uneven. Revenues for the last quarter of ReneSola decreased by 29.3% on a YOY basis. In addition, it provides a third quarter weaker than expected in terms of turnover and profitability.
In addition, estimates of future operating cash flow growth are low. Therefore, the action SOL is struggling to come as it continues to lose value.
As of the publication date, Muslim Farooque does not have (directly or indirectly) any position on any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Muslim Farooque is a passionate investor and an optimist at heart. A long-time player and passionate about technology, he has a particular affinity for the analysis of technological stocks. Muslim holds a Bachelor of Science in Applied Accounting from Oxford Brookes University.