Solar energy stocks continued their slide this week, as investors feared the worst for the renewable energy market. Not only are installations dropping, higher rates are squeezing margins, and not all companies will be able to weather the storm.
According to data provided by S&P Global Market Intelligence, Maxeon Solar Technologies (NASDAQ: MAXN) fell 17.6% since Friday’s close, SunPower (NASDAQ: SPWR) is down 15.5%, and NextEra Energy Partners (NYSE: NEP) is down 13.3%.
Interest rates have been up and down over the past month, and at least in the first four days of trading this week, rates were on the rise, which is bad for renewable energy companies. When rates go up, it makes long-term assets like a solar or wind power plant less valuable, putting pressure on costs or forcing installers to charge higher prices for electricity. Solar stocks in particular have gyrated based on rate changes all year, and this week, higher rates meant lower stock prices.
A downgrade of NextEra Energy Partners by Seaport Global to sell with a $15.50 price target was a big shock to the market. NextEra Energy Partners is one of the biggest renewable energy buyers in the world, and if they’re in financial trouble, it will impact suppliers like Maxeon and installers like SunPower.
What Seaport Global questioned was the company’s ability to pay its lofty dividend long term. After agreeing to sell $1.82 billion in pipeline assets to Kinder Morgan early in the week, management confirmed their intention to grow the dividend 5% to 8% from an annualized $3.42 dividend per share for the second-quarter 2023 distribution without the need to raise equity funds until 2027.
Higher rates are sure to be a headwind for NextEra Energy Partners, but the $3.42 dividend implies a yield of 14.3%, which gives the company flexibility to reduce the dividend and still be a great value.
Maxeon will release earnings next Wednesday, and investors are now concerned about what the company sees for the future. In October, management said third-quarter revenue would be $224 million to $229 million, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) down $30 million from what was previously expected. However, we need to know about future demand, and with guidance coming in weak for most suppliers, there’s worry the next few quarters will be terrible.
The entire renewable energy industry is in a precarious position because rising interest rates have led to a drop in demand for installations and ultimately solar equipment. We’ve seen most companies cut revenue and outlook, and the market doesn’t seem to know where the bottom is.
Volatility has become the norm for solar energy stocks, but don’t let that be the reason to avoid the industry. This is still a growing industry, and energy needs will only increase in the future. Short-term volatility can be a buying opportunity, and I think we are reaching lows that make these attractive stocks for investors.
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