The Solar Narrative Vs. The Stocks
In its 2024 Q2 and Q3 earnings reports, Enphase Energy had an optimistic tone on their earnings call. The solar system installer looked ahead to 2025, expecting interest rate cuts to come from the Fed. The confidence of their executive team suggested they would thrive in the coming environment. This turned out to be a solar flare. It was the light at the end of the tunnel that dissipated, failing to come to fruition. Why? Will solar stocks finally rip to the moon when the proverbial rate cuts arrive?
No one predicted that Trump would unleash his tariff driven policy in 2025, which raised the cost of materials to build their solar rigs. The other thing that we didn't see coming was the repeal of solar credits by the United States government. Additionally, no one predicted that President Trump would demand rate cuts and even threaten to fire Chairman Powell from the Fed. This has seemingly had a reverse effect of what Trump wanted, as now the Fed has become paralyzed to an extent while they survey the chaos that Trump has reaped in his first 6 months as president.
These 3 conditions, a lack of rate cuts, tariffs to increase business costs and removal of solar government subsidies in Trump's "big beautiful bill", created a solar storm for companies competing in this energy space. The long term view is that solar will be a necessary piece to feed our society's energy needs. However, the narrative has detached from the business reality. The removal of government credits will put these solar companies to the test.
Earlier this year, I sold out of my Enphase Energy shares at $48, taking a substantial loss. I had been buying the dip since $140. In May 2024, I sold out of my Sunrun shares at $12, taking a slightly smaller but still significant loss. I sold out of both because I believed that they could go lower based on shaky business fundamentals. Recently, that has been the case. This morning, Enphase Energy shares are priced at $33, down -23%. Sunrun shares are priced at $5.73, down -40% this morning on the solar credit termination news. Bankruptcy appears to be a real possibility.
In theory, solar was a great investment idea. In practice, it was not for me. Perhaps I could chalk it up to poor timing, mediocre stock picking and unlucky policy. After owning for approximately 2 years, I harvested the losses to lower my tax bill. In retrospect, this prevented another $1,062 of capital loss had I held on. My total realized loss from solar investments is $3,369.
Today, I'm only holding a small position in First Solar (FSLR) to invest in the solar industry. In my opinion, this company is the most likely to succeed of the 3 companies I had invested in, so I kept my shares. I hope to stay invested for a long time. It's currently down -16% on the solar credit news, not as bad as the ENPH and RUN. It seems to have the strongest fundamentals after following these 3 companies since 2021.
A critical nuance of investing in Solar is to distinguish whether the business competes in commercial or residential solar. Enphase and Sunrun are more exposed to the residential solar customer. The subsidy revisions in the recent tax bill imply a larger hit to the companies in the residential sector. The moves in ENPH and RUN confirmed by dropping more than others who compete in commercial solar, like First Solar. It's easy to want to "invest in solar" without considering that residential home installation solar companies might be less efficient than large scale commercial operations. This wasn't obvious to me when I started buying solar stocks. It's a nugget of wisdom gleaned from my solar follies.
While I can be right about a general trend like solar, it is less likely that I'll pick the "winners" that make it long term in this industry. Therefore, I've reduced my solar exposure for now. If I feel the industry sentiment improving, I'll buy more of a solar energy ETF like the Invesco Solar ETF (TAN).
While the long term solar narrative is unaffected, the businesses competing in this space are undergoing growing pains. The subsidies they've grown dependent on are being taken away. Will they survive? Some will, and some will not. That's the reality of business. There is always risk in investing. Threats can come from government action. In this case, a policy reversal spelled doom for solar stocks. Some of them will likely recover in the long term, but that is not much consolation for investors. Maybe I got what I deserved, investing in an industry more reliant on the government, when that government is cutting clean energy subsidies and raising interest rates, while other energy sources like nuclear remain uncut.