Today's notable declines in shares include QuantumScape, SolarEdge, and Sunnova Energy.
Today's notable declines in shares include QuantumScape, SolarEdge, and Sunnova Energy.
Shares of pioneers in clean energy, such as QuantumScape (QS, down 4.4%), SolarEdge (SEDG, down 10.5%), and Sunnova Energy (NOVA, down 3%), tumbled on Tuesday. These companies, which include a cutting-edge electric vehicle battery manufacturer, a rooftop solar inverter company, and a solar energy services provider offering power production contracts, respectively, all suffered losses during trading.
The trio shares some commonalities, including their high reliance on the adoption of clean energy technologies and their current financial losses, making them highly sensitive to long-term interest rates. Consequently, the poor election outcome for clean energy advocates has negatively impacted these factors, particularly the escalating long-term interest rates.
Long-term rates carry significant risk
On Tuesday, the 10-year Treasury bond yield climbed above 12 basis points to reach 4.433%, signaling an escalating long-term interest rate environment. Interestingly, this trend started over a month ago, with demand for long-term bonds dwindling, and current yields are also moderately higher than before the election.
The factors leading to emerging long-term interest rates include the prospect of lower taxes and higher tariffs proposed by Trump's administration, which may inadvertently spark inflation growth. In turn, this has invariably driven up long-term interest rates for both the solar and the electric vehicle industries in 2022. As high-ticket items, such as rooftop solar and electric vehicles, are often financed, rising long-term interest rates can significantly impact both industries, which is reflected in these stock price declines.
Moreover, the three companies have been struggling since Trump's election and the congressional Republican victory. There's speculation that the Republicans may try to repeal incentives for both rooftop solar and electric vehicle production, as per the Inflation Reduction Act. However, this threat might be an exaggeration, considering Republicans from red districts like South Carolina voiced opposition to such a move, potentially reducing the impact on these incentives. The support for electric vehicles from influential figures like Elon Musk may also offset the negative implications.
Despite these industry challenges, a higher interest rate environment can be a formidable obstacle for these companies, even if incentives from the Inflation Reduction Act remain.
QuantumScape, despite its recent milestone of shipping its first solid-state battery for testing, is still in its early stages, with negligible revenue and deepening quarterly losses. The company's strategy of containing its losses to prolong its runway for commercial adoption of next-gen solid-state battery cells is under threat from a higher equity funding cost or a more expensive debt raise in this interest rate environment. In the last quarter alone, the company burned through $110 million in its operations.
SolarEdge, too, has been grappling with issues. Its revenues have plummeted, and profits turned into losses over the past year, partly due to the influx of higher interest rates and a contradictory regulatory environment that eroded market demand for rooftop solar, especially in Europe. With revenues down by 64.1% last quarter, and gross margin plunging into the negative, SolarEdge may have to explore further fundraising options if its current loss pace continues, imposing additional costs to shareholders in this rising interest rate environment.
Similarly, Sunnova, with its service-based model and financial structure akin to a financial company, may face reduced demand for solar services due to the high interest rate environment and potential fossil fuel price falls. Moreover, Sunnova’s long-term fixed cash flows from PPAs will be devalued, impacting its bottom line.
Finally, the negative impact of higher interest rates extends to the discounting of the companies' long-term theorized cash flows, making their present values lower in the future, even if they manage to reach profitability at a later stage.
Despite the recent market turbulence in clean energy stocks, there could be deals that present bargain opportunities. However, given the fluid interest rate environment and regulatory environment, it may be wise to consider more stable, profitable companies instead. At present, these three appear to rely heavily on favorable changes in both interest rate and regulatory landscapes, which could take some time to materialize.
In this context of rising long-term interest rates affecting the clean energy sector, financial institutions may become more cautious when considering investments in companies like QuantumScape, SolarEdge, and Sunnova, due to the potential increase in borrowing costs for these high-ticket items.
The escalating interest rates could also impact the valuation of these companies' future cash flows, potentially making them less attractive to investors seeking stable returns.