Solar inverter manufacturer SolarEdge posted last night preliminary Q3 results that fell well below expectations (revenue 19% below, gross margin 30% below) following cancellations and pushouts of existing backlog from its European distributors. The company noted higher-than-expected channel inventory and slower-than-expected installation rates from the end of the summer.
This weakness in Europe was clearly unexpected as the region had been a major source of strength until now, with risks of power outages and rising utility bills incentivizing many consumers to shift to solar installations. We suspect interest rates could be the culprit, with consumers probably finding it more expensive and less profitable to finance an installation and distributors likely seeking to cut their inventory levels to reduce funding needs.
These issues in Europe, if not-SolarEdge specific and then confirmed by other residential solar players, would add to the already known headwinds in the US (notably the new net energy metering policy in California, NEM 3.0) and contribute to a prolonged slowdown for residential solar names (well until Q2 2024)… and to another major valuation reset with some stocks expected to be down around 20% today.
Fortunately, we have materially cut our exposure to residential solar stocks (inverters, installers) over the last year for a weight in our portfolio that currently amounts to a mere 8%. Utility-scale solar names, which appear more defensive currently, have a 7% weight.
That said, the solar issues should cast a shadow on the whole cleantech ecosystem and act as a reminder that most business models are capital intensive and that consumer/corporate demand for cleantech solutions is highly dependent on availability and cost of project financing. Definitely, we are talking here about rate-sensitive businesses, that will need to see rates start going down before accelerating their revenue growth and enjoying a valuation rerating.
To end on a constructive note regarding project funding in the cleantech space, we would highlight that the US announced that seven regional hydrogen hub applications have been selected to receive $7 billion of funding support as part of the Inflation Reduction Act. That should help ease some funding issues in the hydrogen ecosystem and provide electrolyzer/fuel cell makers (Plug, Bloom…) with a large revenue opportunity, even if most of the commercial opportunity is probably a couple of years away.