'Disconnected from fundamentals': US solar's 2023 stock rout defies upsides

The US solar industry's continued growth in 2023 has been overshadowed by the negative impacts of inflated interest rates, state policy reforms and a global glut of photovoltaic panels. That troublesome trifecta has sunk US-listed solar stocks this year.

A select S&P Global Commodity Insights index of publicly traded photovoltaic (PV) companies active across the sector is down roughly 50% so far in 2023, as of Nov. 17, compared with a 17% rise for the S&P 500. Solar stocks slumped severely in the third quarter under the weight of widespread missed revenue and earnings expectations. Several companies also unveiled painful impairments and dimmed near-term outlooks.

And yet, significant upsides remain. Overall US demand for PV is on pace for a record year, led by large-scale solar. S&P Global Commodity Insights anticipates 37 GWdc of total installed capacity in 2023, up from 22 GWdc in 2022. The Inflation Reduction Act (IRA) the landmark 2022 climate law, is buoying solar bottom lines while unlocking billions of dollars of private investment and creating thousands of new jobs. Meanwhile, utility electric rates continue to soar in key markets, giving homeowners and businesses added incentive to buy or lease on-site arrays.

Among those exceeding the earnings expectations of investment analysts is Arizona-based First Solar Inc., a producer of thin-film panels. The company, which is harnessing IRA manufacturing tax credits to aggressively expand its domestic production capacity across three states, beat the S&P Capital IQ consensus on third-quarter adjusted net earnings by 22.5%.

"The stock, however, remains disconnected from fundamentals" on "negative sentiment," analysts at Roth Capital Partners said in a Nov. 16 note to clients. Through Nov. 17, First Solar's share price was up about 4% in 2023, distinguishing it from the deep double-digit declines of most companies in the select index.

Crystalline-silicon PV panel-makers with manufacturing mostly in Asia, including Canadian Solar Inc., Trina Solar Co. Ltd. and Maxeon Solar Technologies Ltd., are also moving to take advantage of IRA incentives with major new US production hubs under construction or planned.

But First Solar "has an inherent cost advantage over Chinese module companies manufacturing in the US due to vertical integration," the Roth Capital analysts said.

Canadian Solar, for instance, expects to employ roughly 2,700 workers across its two new 5-GW cell and module factories in the US, the same number of people First Solar said it needs for its entire 14 GW of existing and planned domestic manufacturing capacity, according to the note.

On a per-watt basis, crystalline-silicon PV producers require about 2.5 times more workers than First Solar, Roth Capital analysts said.

Seeking rooftop recovery

Nevertheless, Roth Capital rates both First Solar and Canadian Solar as "buy" opportunities, along with a host of other downtrodden solar stocks.

Some of the hardest-hit shares in 2023 belong to rooftop solar specialists Sunrun Inc., SunPower Corp., Sunnova Energy International Inc., SolarEdge Technologies Inc. and Enphase Energy Inc., which have all experienced deteriorating demand in the second half of 2023. That is partly the result of a falloff in California, where the Public Utilities Commission this year slashed compensation for solar exported to the grid under a sweeping net metering reform that encouraged battery-backed systems.

A rebound for solar at US homes and businesses hinges on two primary factors, according to Badri Kothandaraman, president and CEO of Enphase Energy, which supplies solar panel power electronics, energy storage systems and electric vehicle chargers.

"It depends on utility rates and interest rates," Kothandaraman said in an interview following Enphase's third-quarter earnings call. Enphase narrowly beat the S&P Capital IQ consensus on earnings but narrowly missed expectations on revenue in the period. The company also forecast a sharp drop in fourth-quarter revenues amid what Kothandaraman deemed a "decisive inventory correction."

The CEO expects US residential demand to recover by the second quarter of 2024.

"If all utility rates were going up, solar would suddenly be in favor," the CEO said. "And that's what will happen in California."

The PUC on Nov. 16 approved a general rate case for PG&E Corp. operating arm Pacific Gas and Electric Co. (PG&E) that will boost bills for typical residential customers in its Northern and Central California service area by nearly 13% in 2024.

"My prediction is you will start to see a spike in California because of PG&E," Kothandaraman said.

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