Following Tough Earnings, What’s Next For The Solar Theme?

Our theme on Solar Stocks – which includes solar panel manufacturers, systems installers, and component suppliers – has declined by about 15% year-to-date in 2023, compared to the S&P 500 which has gained about 20% over the same period. While solar stocks fared well through the Covid-19 pandemic driven by the government stimulus and easy monetary policy, they have corrected recently as rising interest rates over the last year or so impacted high multiple stocks. Moreover, policy-related headwinds, namely the changes to the net metering policy in California – the U.S. state with the largest solar installations – appear to have impacted stocks that are dependent on the residential market. Weaker-than-expected earnings from residential solar major SunPower and tough near-term guidance from microinverter suppliers Enphase Energy
ENPH
and SolarEdge have also impacted the theme.

That said, there are multiple long-term positives for the solar sector. The biggest tailwind for the solar industry comes from the Inflation Reduction Act, which was signed into law in August 2022 and carries about $370 billion in subsidies and credits for clean energy investment. For example, First Solar
FSLR
will emerge as a big beneficiary of the U.S. efforts to encourage domestic renewables production, with the panel maker expecting to receive as much as $710 million this year in subsidies. Moreover, supply chain snags that hit most industries have also been easing this year and this could help improve supply and margins for solar manufacturers. Inflation has been cooling and the Fed has also paused its interest rate hikes. There also remains a long runway for the uptake of solar as an energy source. A 2021 study by the Energy Department indicated that solar could account for 40% of electricity generation in the U.S. by 2035, up from less than 5% in 2022.

Within the theme, First Solar has been the strongest performer, with its stock rising by 33% year-to-date, as the company’s residential panels cater more to utility-scale projects, which are expected to fare a bit better this year. On the other side, SunPower, which is largely focused on the residential solar business, has been the weakest performer, with its stock declining by about 50% year-to-date.

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