Solar stocks are having a lackluster year so far. There are several reasons why they have witnessed a significant correction, and these headwinds won’t be fading anytime soon.
Higher costs due to rising polysilicon prices have severely impacted solar energy companies. The pandemic also disrupted supply chains, which increased transportation costs as a result.
Moreover, investors are worried about higher interest rates, which affects solar stock prices. The Federal Reserve is expected to begin tapering the purchase of financial assets later this year. This will push interest rates higher and reduce the viability of solar projects.
Additionally, utility companies in California — the top solar energy market — have proposed reduced payments for residential solar power systems.
All these factors have collectively impacted investor sentiment, but these solar stocks are worse off than others:
- Daqo New Energy (NYSE:DQ)
- Sunrun (NASDAQ:RUN)
- Enphase Energy (NASDAQ:ENPH)
- First Solar (NASDAQ:FSLR)
- SunPower (NASDAQ:SPWR)
- Invesco Solar ETF (NYSEARCA:TAN)
- ReneSola (NYSE:SOL)
Solar Stocks: Daqo New Energy (DQ)
Daqo New Energy is a Chinese manufacturer of polysilicon used in solar technology products. The company has had an impressive run in the past few years and continues to be a front-runner 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 earnings results have been staggering lately, boosted by high average selling prices (ASPs). In its second quarter, it posted nearly 231% year-over-year (YOY) growth in revenue to $441.4 million.
Moreover, gross margins shot up to 68.7% from the 17% it generated in the second quarter of 2020. Additionally, its EBITDA margin made a massive jump from 20% in Q2 2020 to more than 70% this year. The massive discrepancy in margins points to the volatility of polysilicon ASP, which raises concerns about DQ stock’s lofty valuation.
Sunrun has established itself as a dominant force in rooftop solar. Though it faces stiff competition from companies such as Solar City and other upstarts, it has held its own.
Its financial performance has been spectacular in the past three quarters, posting double-digit revenue growth. But the concerns surrounding its business model make RUN stock a risky bet.
Sunrun sells long-term solar products such as rooftop solar loans. Though they can be lucrative, they carry immense risk given how solar technology is evolving. Products can become outdated quickly, creating dissatisfaction among customers.
Moreover, Sunrun’s dependence on distributed energy rather than centralized energy could be costly in the future.
Solar hardware expenses have been dropping at a healthy pace, which leaves soft costs to form a major portion of its expenses. However, distributed energy has more soft costs than centralized energy, which complicates things for Sunrun.
Solar Stocks: Enphase Energy (ENPH)
Enphase Energy is a California-based producer of home energy services for the solar photovoltaic industry. Its software-driven energy solutions cover solar generation, home energy storage and other related technologies.
While its products are appealing, Enphase will be impacted by supply constraints due to the lingering effects of semiconductor shortages. But despite this challenge, ENPH stock trades at a massive 16 times forward sales.
Its earnings performance has been extraordinary in the past few quarters, with triple-digit growth in revenues in Q2. However, capacity problems that result from the ongoing chip shortage will hurt the company’s performance.
Additionally, these constraints are likely to slow Enphase Energy’s expansion into new markets. Nevertheless, ENPH stock has been pushing the pace and is now incredibly overpriced against its relatively weak outlook.
First Solar (FSLR)
First Solar is an Arizona-based designer and manufacturer of solar modules and power systems. It utilizes thin-film photovoltaic technology that helps it sustainably develop its solar modules.
In the past few years, the company has established its position as a major player in the solar sector. However, near-term headwinds related to supply constrictions and lower ASPs will affect its profitability and FSLR stock’s performance.
First Solar recently trimmed down its earnings per share outlook for the year to $4 to $4.60. Its lackluster second quarter saw a 21% drop in net sales and a 56% decline in operating income on a sequential basis.
One of the main reasons for First Solar’s drop in earnings is its transition away from its project development, sales and maintenance segments. Moreover, with the company booking a major portion of future sales at fixed pricing, it won’t charge higher ASPs to tackle the higher input costs.
Solar Stocks: SunPower (SPWR)
SunPower is a top solar solutions provider operating in the residential, commercial and industrial solutions segments. In the past few years, it has done well to streamline its business by improving its margins.
Last year, the company spun off Maxeon (NASDAQ:MAXN) and thus strengthened its balance sheet. However, its fundamentals remain weak, which limits its ability to generate sizeable free cash flows.
Revenue growth on a YOY basis has been disappointing and lags the sector median by a hefty margin. Sunpower’s revenue increases slowed significantly in recent quarters. Additionally, its third-quarter guidance lags analyst expectations by $16.7 million.
EBITDA growth on a YOY basis has slowed even more than Sunpower’s revenue increases. With such weak earnings power, it’s tough to get excited about SPWR stock.
Invesco Solar ETF (TAN)
The Invesco Solar ETF is arguably the best indicator to gauge the solar industry’s health. Looking at the past 12 months, returns have been solid and have outperformed the S&P 500 by a significant margin.
However, this ETF has shed more than 19% of its value since the beginning of the year. In contrast, the S&P 500 has gained 18.5% in the same period.
The fund has slowed down considerably in the past six months due to pandemic-driven manufacturing disruptions. Tensions between the U.S. and China also contributed to the ETF’s decline. The blacklisting of Chinese polysilicon manufacturers, in particular, is a major threat to TAN’s returns.
A large portion of its holdings includes solar companies listed in the U.S., which has inflated TAN stock’s valuation at this point. With multiple headwinds to face, investors should avoid this ETF for now.
Solar Stocks: ReneSola (SOL)
Connecticut-based ReneSola develops, operates and sells solar power projects in the U.S. and Europe. It was making solar panels and modules similar to its peers, but sold off its manufacturing business in 2017.
The company now focuses on building and selling solar farms, which are less prone to price fluctuations. However, this particular service is capital-intensive, which impacts ReneSola’s ability to generate free cash flows.
Its earnings performance has been patchy as well. Revenues in ReneSola’s latest quarter were down 29.3% on a YOY basis. Moreover, it predicts a weaker-than-expected third quarter in terms of revenue and profitability.
Additionally, forward operating cash flow growth estimates are weak. Hence, SOL stock has a difficult time ahead as it continues to lose value.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.