This week on BRIIDGE Recaps
11 JUNE 2024
Are Further Troubles Ahead For The Solar Industry?
As the solar industry underperformed for most of 2023 and into 2024, investors are speculating whether the recent short-term bounce indicates a long-term trend reversal. With a negative spread of over 80% against the market(S&P 500) since April 2023, is there an opportunity ahead?
Despite an influx of capital, accommodative policies, and government stimulus aimed at accelerating the shift to cleaner energy, solar industry stocks are weighed down by poor fundamentals compared to peers and the long-duration nature of their earnings, similar to the tech sector.
Fig 1: Performance 1YR Horizon
BRIIDGE Shortcut: TS Reference Index
Fig 2: Sales Growth [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
As interest rates rose to historic levels, the higher debt burden for clean energy companies, such as solar stocks that heavily rely on debt to finance long-term projects, contributed significantly to downward valuation adjustments.
The correction was exacerbated by speculative pressure from the anticipation of government stimulus in 2021, which drove the solar industry to historic and unsustainable valuation levels (median PE > 90 in 2021).
As valuation compression followed a steep rise in interest rates, decreasing sales growth across the industry, along with increasing debt margins, lower operating and net income margins relative to the broader energy sector, maintained pressure on the industry.
The anticipated acceleration in sales for the solar industry failed to materialize, rendering the 2021 forecasted valuation metrics obsolete.
Fig 3: Operating Margin [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 4: Free-Cash-Flow To Sales [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
For a long-term sustainable trend reversal to manifest, interest rates must come down, and fundamentals must improve to align with valuation metrics.
Among the solar Industry, First Solar (FSLR | NASDAQ) stands out with a lower debt burden, rising gross profit and operating margins, and increasing sales.
Analysis In Graphs:
Fig 5: Net Income Margin [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 6: Performance [1YR]
BRIIDGE Shortcut: TS Reference Index
Fig 7: Dividend Yield
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 8: Net Debt To Ebitda [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA