Management commentary on the impact of rising costs will be critical, as investor concerns about pricing pressures and supply chain bottlenecks have contributed to the group’s recent weakness.
SolarEdge and Enphase both saw their stocks fall during the first quarter after both companies warned about macroeconomic headwinds. During last quarter’s earnings call, SolarEdge management stated that ocean freight costs had more than doubled, while Enphase warned that second-quarter shipments would be constrained due to a global chip shortage.
Furthermore, raw material prices, such as steel and copper, are rising, which could put additional pressure on margins.
In a recent client note, JPMorgan stated, “Supply chain disruption remains front and center for investors in the near term.”
According to Gail Nicholson, an analyst at Stephens, sales and freight expenses will “remain elevated for the remainder of the year” before improving in 2022. She anticipates that costs will be between 5% and 10% higher in the second quarter compared to the previous quarter.
The Invesco Solar ETF, ticker TAN, has recovered from its low in May as first-quarter earnings reports weighed on it, and the fund is up about 4% over the last two months as of Monday’s close. However, it is still down more than 20% for the year, trailing the S&P 500′s gain of nearly 17%. Longer term, the fund’s trend is upward, with shares up roughly 70% in the last year following 2020’s record return.
“We believe the focus will be on the supply chain as investors grapple with the prospect of volatility in input costs as well as component shortages in contrast to a robust demand environment showing only minor signs of abatement,” Goldman Sachs said in a recent client note.
In addition to rising costs, policy uncertainties are weighing on solar stocks. President Joe Biden’s commitment to climate-friendly policies was a major motivator for the group. However, he has faced opposition from the Senate thus far, and an infrastructure bill has yet to be passed.
The initial infrastructure package unveiled in March included over $600 billion in climate-related spending. It also included a provision to extend the investment tax credit, which is critical for the planning prospects of solar developers. This tax credit was most recently extended in December by President Donald Trump.
According to Cowen analysts, this uncertainty, combined with price inflation, could lead to a “wait and see” strategy for large-scale utility solar developers. “The slowdown is more pronounced in utility scale solar compared to residential due to the pivotal effects [the investment tax credit] and tax equity financing have on them,” the firm wrote in a client note.
In other words, companies will not start major projects until they know what the regulatory environment will be like.
Companies are also waiting for clarity on US policy on imports from China’s Xinjiang region. The Biden administration blacklisted imports from a single company in the region, Hoshine Silicon, in June. In July, the Senate passed the Uyghur Forced Labor Prevention Act, which would prohibit imports linked to forced labor in the region. According to JPMorgan, while enough non-Xinjiang polysilicon manufacturing is likely to be available to supply the US market, there may be short-term delays or increased costs associated with component sourcing verification.
“Volatility has increased over the last month as investors struggle to determine whether absolute valuation levels remain too high (quite possible) and thus poised for a third post-earnings correction, or if the known headwinds have now been baked in and any sign of improvement coupled with healthy demand and improving storage economics could ignite wider interest,” according to Barclays.
Do you want to buy the dip?
Despite uncertainty about costs and policies, Wall Street analysts remain bullish on the group, citing its long-term growth potential.
Any post-earnings volatility, according to JPMorgan, could be a buying opportunity. The average multiple on alternative energy stocks, according to the firm, is now lower than the one-year average.
“We remain positive on the stocks under coverage heading into print, and we remain positive on industry fundamentals from a mid-to-long-term perspective,” the firm said, adding that catalysts for the second half of the year include a potential infrastructure bill and the COP26 United Nations Climate Change Conference.
According to analysts led by Mark Strouse, supply chain disruptions vary greatly by company and market, so investors should look for company-specific stories. Sunrun and Sunnova are Strouse’s top picks for the second half of the year. He emphasized the companies’ above-average inventory levels, which “positions each company to meet 2H21 demand irrespective of supply chain or geopolitical disruption.”
Sunrun is also favored by Barclays, which recently named the residential solar installer its top pick. Sunrun, according to the firm, is most exposed to growing demand in California, and the stock hasn’t outperformed despite a “stellar” first-quarter earnings report.
We believe that the world is committed to cleaner energy, which we believe will support healthy growth in the solar industry for the foreseeable future.
On the other hand, Barclays initiated coverage of Sunnova with an equal-weight rating on Tuesday, stating that despite stellar growth, the firm expects the company’s unit metrics to lag those of Sunrun.
RBC also began coverage of Sunnova on Tuesday, but unlike JPMorgan, the firm is bullish on the stock and rates shares outperform. Analysts led by Elvira Scotto wrote in a note titled “all suns blazing” that solar is “at the very least in the third inning” and that Sunnova is “capturing a larger portion of the market’s growth.”
Stephens’ Nicholson raised her targets and estimates for solar stocks earlier this month, including Enphase, Sunnova, Sunrun, and SolarEdge, which she rates overweight.
“We believe the world is committed to cleaner energy, which should support healthy growth in the solar industry for the foreseeable future (we continue to have a positive outlook on the sector),” she wrote in a client note.
Despite supply chain concerns, Goldman is bullish on inverter companies ahead of the print, with buy ratings on both Enphase and SolarEdge. Enphase is expected to outperform expectations and show continued strength in residential demand, according to the firm.
Goldman also expects SolarEdge to outperform expectations with “clean topline and gross margin execution.” The company’s new residential storage product debuted in the second quarter, and the company said it will be looking for feedback on customers’ initial reactions.
Calendar of earnings:
Enphase Energy: 27th of July
28th of July, Sunnova
The first solar eclipse will occur on July 29th.
August 2nd, SolarEdge
SunPower: 3rd of August
5th of August, Sunrun