The storm clouds loom ominously over solar stocks as Sunrun takes a hit in the latest earnings report. Residential solar companies are struggling due to weak demand, in part caused by higher interest rates deterring consumers from financing home solar projects. Changes in California’s incentives for rooftop solar and a decline in demand across Europe are also contributing to the industry's challenges.
Recovery Hinges on Interest Rates
The hope for a sector rebound rests on lower interest rates, but the timeline for the Federal Reserve to act remains uncertain—especially given the recent release of minutes from the central bank's latest meeting.
Sunrun's fourth-quarter results painted a bleak picture, with a loss of $1.60 per share significantly wider than Wall Street's expected 21 cents. Revenue plummeted to $517 million, a 15% decline from the previous year and below estimates of $533 million as per FactSet data. As a result, Sunrun stock tumbled 9% before Thursday's opening bell.
A Tough Earnings Season
Earnings season has not been forgiving to residential solar companies, with Sunnova also reporting disappointing results post market close on Wednesday. The Houston-based company revealed a loss of $1.53 per share, far worse than the anticipated 26 cents-per-share loss according to FactSet data. Additionally, revenue fell short of expectations, leading Sunnova stock to drop by 5% early Thursday.
Solar Sector Faces Uncertain Future
Shares of SolarEdge dropped by 12% on Wednesday following a 65% decline in revenue during the fourth quarter, setting a bleak tone for the beginning of 2024. The hit was felt across the solar industry, with Sunrun and First Solar both experiencing a 2% decrease in their stock prices. The Invesco Solar exchange-traded fund (ETF) also took a hit, falling by 2.3% and now down by a staggering 40% over the past year.
Industry Outlook
While Wednesday's session saw a downturn for most solar companies, Thursday seemed to promise some stability, with Enphase Energy up by 0.8%, First Solar rising by 1.3%, and SolarEdge recovering slightly with a 0.2% increase. However, Sunrun and Sunnova continued to face challenges.
Federal Reserve's Influence
The Federal Reserve holds a significant role in the potential recovery of the solar sector. Lower interest rates could potentially drive demand for solar panels. Unfortunately, recent minutes from the central bank hinted at the possibility of maintaining higher rates for an extended period. The Fed remains cautious about cutting rates until there is more confidence that inflation will reach its 2% target.
Analyst Predictions
Despite the current challenges, analyst Biju Perincheril from Susquehanna remains optimistic about Sunrun stock. With a positive rating and a price target of $25, he foresees a 60% upsurge from Wednesday's closing price. Perincheril identifies interest-rate cuts as a crucial driver for the stock, highlighting higher rates as a downside risk.
The Path Forward
While uncertainties loom, many anticipate that the Fed will eventually reduce rates sometime this year. Although investors may need to exhibit patience, there is hope that the dark clouds hovering over the solar sector will dissipate in due time.
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