Forget Trump: This Is What’s Really Hurting Solar Stock Prices Required rates of return for solar projects are going up, and that's hitting solar developers on the bottom line. Travis Hoium (TMFFlushDraw) Nov 16, 2016 at 11:11AM
2016 has been a pretty terrible year for solar stocks, with the entire industry down. The biggest shock may be that leaders like First Solar, Inc. (NASDAQ:FSLR), SunPower Corporation (NASDAQ:SPWR), and Canadian Solar Inc (NASDAQ:CSIQ) have all seen stock prices plunge as well.
FSLR Chart
FSLR data by YCharts
A lot of factors have hurt solar companies, from falling panel prices to a lack of demand for projects in 2017. But what shouldn't go overlooked is the decline in project prices as buyers demand higher returns on solar projects. And the price 8point3 Energy Partners LP (NASDAQ:CAFD) just paid for a project from First Solar shows just how far the industry has fallen.
Row Of Homes With Solar
Image source: Getty Images. The dropping price of solar projects
Solar project developers depend on utilities, yieldcos, and other investors paying a price for solar projects that will be profitable for them. One way we can see how solar project pricing and rates of return are changing is to look at the purchase price and expected annual cash flow from projects over time.
This year, 8point3 Energy Partners has made three major project purchases from SunPower and First Solar -- and you can see that rates of return have been on the rise all year.
Screen Shot
Data source: 8point3 Energy Partners press releases and earnings presentations.
The timing of specific cash flows from each project and assumptions within the pricing model aren't known, so the rate of return difference between Kern and Stateline might be less than 2% on 8point3 Energy Partner's internal model. But we can generally assume that required rates of return are going up and the value of projects is going down. This is great for 8point3 Energy Partners' ability to buy projects accretively, but it's a negative impact for First Solar, SunPower, and Canadian Solar selling projects. Developers are facing a rough market
We've recently seen disappointing results from First Solar and SunPower, along with fairly unimpressive guidance, and this trend in project pricing can be blamed directly. Given the figures above, if Stateline, for example, had an implied rate of return of 7.7%, it would have been worth $415.6 million, an $86.1 million increase from what it was sold for. This would have directly benefitted First Solar's bottom line.
If project rates of return continue to rise, it could result in difficult economics for solar project development. That could be one reason First Solar and SunPower have said they'll move into more component sales, taking less risk on projects maintaining a low rate of return to create value.
No matter what part of the solar market you're investing in, it's important to understand how rates of return affect project prices, because they can drive profits and losses very quickly for solar companies.
What the Hell Is Going On With Plummeting Solar Stocks? What the Hell Is Going On With Plummeting Solar Stocks?
It’s not the oil factor, says a UBS equities analyst. It’s pricing pressure and leverage. by Stephen Lacey October 26, 2016 29
This year has been brutal for public solar companies. While the S&P 500 is up 5 percent since January, many of the leading publicly traded solar firms have faced steep declines in their stock prices, and, consequently, have initiated big rounds of layoffs.
The year also saw the collapse of ambitious developer SunEdison -- erasing a $9 billion market cap in nine months.
In his opening presentation at this year's Solar Market Insight conference, Shayle Kann provided a short list of some of the worst-performing solar companies. They happen to be some of the biggest in their respective sectors. It's not a pretty picture.
What does this chart tell us? Have investors soured on solar because they think there's something fundamentally wrong with the sector? Or have low oil prices done more damage to investor confidence than anyone predicted?
Kann asked the question bluntly: "What the hell is going on with solar stocks?"
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It's neither oil prices nor an indication that investors hate solar, said Julien Dumoulin-Smith, a utility and renewable energy equities analyst at UBS. It's more specific to company strategies and sectoral pressures.
"It’s really discrete subjects pertaining to each of these companies," said Dumoulin-Smith, speaking to Kann at the SMI conference this morning. (Subscribers to GTM Squared can access the full conversation here.)
SunEdison's failure was simple. It was financial mismanagement and overreach. "What happened [with SunEdison] is no different than other companies that have seen their demise -- it's leverage," said Dumoulin-Smith.
That's completely different from companies like SunPower or First Solar -- or any other solar manufacturer, for that matter -- which are facing intense pricing pressures due to a module oversupply. Between the fourth quarter of 2015 to the end of 2017, GTM Research expects U.S. module prices alone to drop nearly 50 percent under a base-case forecast.
"I think that one is at its core the clearest. That's a pricing issue right there," said Dumoulin-Smith.
After the extension of the federal Investment Tax Credit, SunPower and First Solar have also adjusted guidance for power plant development downward as the urgency to complete projects diminishes. SunPower CEO Tom Werner also blamed "irrational PPA pricing" for eroding the company's margins.
On the residential side, the problems are leverage and the rush to scale. SolarCity is the most egregious example. "SolarCity is the most levered [solar company] we've ever seen, and it's a direct result of their corporate strategy," said Dumoulin-Smith.
SolarCity's growth-at-all-costs strategy has caused problems as U.S. residential installation growth has slowed, customer acquisition costs have risen, local installers have started to offer better pricing, and the company's cash-burn rate accelerates.
Dumoulin-Smith also warned about the over-issuance of convertible bonds -- a bond that can be converted into stock. Although convertible bonds look like a stock issuance, they pile on debt if holders decide not to convert them into equity.
"Renewable energy companies tend to use convertible bonds and treat them as a share issuance. This is what levered SolarCity," he said.
Convertible bonds have complicated Tesla's planned acquisition of SolarCity, as they may force Tesla to take on a lot more debt.
SolarCity and bankrupt SunEdison are the two biggest issuers of convertible bonds -- accounting for three-quarters of volume in the renewable energy space. "These companies think they should just be using leverage. The solar industry is so implicitly aggressive in using their leverage," said Dumoulin-Smith.
With falling equipment prices, an extension of the Investment Tax Credit, and strong net metering policy in place in a majority of states, "these should be the cream-of-the-crop days," he said.
Dumoulin-Smith believes that downstream public solar companies should reset expectations about growth and returns. "Largely, infrastructure investors are looking for a low-risk, medium-return profile. You should not expect this to be a high-return business. That’s not necessarily a bad thing."
It's only bad when the returns are low for the wrong reasons.
