Solar stocks could rebound in the second half of 2024 after taking a beating this year, though the industry’s recovery depends largely on whether the Federal Reserve raises interest rates again.
The battered industry rallied Tuesday after U.S. inflation cooled in October and Treasury yields fell in response. Traders have taken further rate hikes almost completely off the table, which bodes well for the solar sector heading into next year.
The Invesco Solar ETF (TAN), which tracks the industry, surged 10.5% Tuesday. The inverter manufacturers Enphase and SolarEdge jumped about 16.3% and 10.8%, respectively. The installers SunPower, Sunnova and Sunrun surged 15.2%, 16% and 18.9%.
Panel manufacturer First Solar, which stands out for delivering solid performance this year, rallied 11.4%.
The rally comes as the residential solar industry looks toward the end of a rough year, with demand softening significantly as repeated rate hikes made installations unattractive for consumers.
“The big headwind is interest rates,” said Julien Dumoulin-Smith, a stock analyst who covers clean energy for Bank of America.
Clean energy is a leveraged industry and consumers are less inclined to take out what is tantamount to a home equity loan to build a solar project when rates have risen dramatically quarter after quarter, Dumoulin-Smith said.
“You’ve seen a sharp slowing in activity. Obviously, earnings are trailing or historical by their very nature and so we’re really starting to see those higher interest rates hurt,” he said.
The residential solar companies misread the market this year after a record 2022. They stocked up on equipment after inventory fell to a very low level during the pandemic, and failed to catch on to softening demand quickly enough, according Corinne Blanchard, a stock analyst at Deutsche Bank.
“It just accelerated much faster than they anticipated,” Blanchard said.
The Invesco Solar ETF is down about 36.9% for the year. Enbridge and SolarEdge are down 65.5% and 71.9% respectively, while SunPower, Sunrun and Sunnova have plummeted 75.7%, 45% and 54.3%, respectively.
The only solution is for the companies to cut through inventory, Blanchard said. They will need about six to nine months to do this before their revenue run rate starts to normalize, she said.
Wood Mackenzie forecasts the residential solar market will contract by 4% overall in 2024, but bottom out in the second half of the year and bounce back in the fourth quarter. The energy consultancy projects 8% growth for 2025.
Watch and wait for now
Though the residential solar stocks are cheap right now, investors should stay on the sidelines for the time being because there is still potentially 10% to 15% downside if the companies’ guidance is flat or revised downward heading into the first quarter of 2024, Blanchard said.
The residential solar stocks will probably be broadly revisited on the buyside sometime around the spring of 2024, Blanchard said, though this also depends on what the Federal Reserve does with interest rates.
SunPower is the one stock that Deutsche Bank has issued a sell rating on. The company revised its guidance twice this year and has high exposure to California, according to Blanchard. Demand has been hit particularly hard in the Golden State as a new net metering tariff, called NEM 3.0, goes into effect. It reduces the credit households get for surplus solar energy they send to the grid.
Dumoulin-Smith said the solar industry has a problem if rates don’t top out. “Rates turning around is the single best thing that can happen,” the Bank of America analyst said.
The market expects the central bank to cut rates in the spring, but Fed Chairman Jerome Powell said earlier this month that he and his colleagues are “not confident” they have done enough to bring inflation down to 2%.
Goldman Sachs, however, predicted that rates will still remain elevated in 2024 at range between 3.5% and 3.75%, a full point higher than the Fed’s unofficial forecast at its September meeting
First Solar ‘immune’
There is still a market for residential solar even in an elevated rate environment, particularly in jurisdictions with higher utility costs such as the Northeast, Dumoulin-Smith said. And there is strong underlying demand, particularly among the bigger customers.
“Demand for power is fundamentally getting revised higher,” Dumoulin-Smith said. “Utilities and corporates alike are going to be going out for procurements to get more renewables in the first half of next year because they need timely ability to ramp generation — they need supply.”
First Solar is the one stock that’s largely “immune” to the current environment, Blanchard said. This is because the company simply isn’t really exposed to the residential space. First Solar, which manufactures solar panels domestically, does most of its business with large utilities.
Dumoulin-Smith said there is a strong case to be made for First Solar as a defensive play. The company has delivered on earnings growth quarter after quarter this year and will continue to do so through 2024, he said. First Solar’s stock is flat for the year.
James West, a stock analyst with Evercore ISI, said First Solar is doing well but there also won’t be an upside surprise either with the company’s orderbook sold out through 2026.
“They just keep chugging along,” West said of First Solar.