[Economics] Are Solar Energy Stocks a Buy Today?

[FazzNoth]

Solar energy stocks have fallen hard over the past few months as investors have questioned the growth trajectory and profitability of the industry while interest rates rise and the economy recovers from the pandemic.

Manufacturers like First Solar have been impacted, as have component suppliers like Enphase Energy and SolarEdge Technologies, along with installers like Sunrun and SunPower.

Here's a look at why solar energy stocks are down and what to think about the industry long term.

 

Interest rates are the biggest headwind

I think it's important to start with how solar projects are built and financed. Most solar installations are financed through a large percentage of debt, so when interest rates rise, it's a headwind for the industry. Not because today's installation costs change with interest rates, but because future cash flows 20 or 30 years in the future become less valuable for investors. I'll note that terms of a project can change with escalators being higher or variable rates if higher rates are sustained, but the baseline point that interest rates are important is still true because it's a headwind.

 

This chart illustrates how important interest rates are to development projects, showing expected annual cash flows, various interest rates, and what 30 years of cash flows would be worth if we discount them back to today's dollar value (as investors do). If rates rise, the profitability of project developers can plunge very quickly.

https://www.nasdaq.com/articles/are-solar-energy-stocks-a-buy-today