SolarEdge (NASDAQ: SEDG) stock is down another 20% on the results and financial projections release. SEDG stock is now down near 50% since the worries about stocks and sales levels first surfaced. This is also happening at Enphase Energy. We’d suggest that this is a sector wide problem, something caused by the changes in relative prices caused by rising interest rates. This is also something that’s not about to go away - interest rates might be at or near the peak of the cycle but they’re not going to decline that fast.
The results are mildly disappointing: “Quarterly revenue of $725.3 million also came in below estimates of $768.38 million.” That’s not really the problem. It’s the forecast for the current quarter: “The company, whose market capitalization has dropped more than half this year, forecast current-quarter revenue between $300 million to $350 million, far below analysts' estimates of $687.9 million, as per LSEG data.” OK, it may be temporary and all that but the business just halved in size.
The earnings call explains some of it. Demand was high in recent quarters, they tooled up to meet that then hit this falling demand. Their production and cost base is out of line with market reality. That booming recent market also meant that the distribution channel was stuffed to meet that demand. As demand falls away there’s therefore a significant backlog that needs to be cleared - systems still be installed but no need for product moving out from SolarEdge to fulfill it.
SolarEdge Technologies stock price from Google Finance
Our point here is that we don’t think this is specific to SolarEdge: “SolarEdge Technologies (NASDAQ: SEDG) stock is down 28% after their results forecast. The point they’ve made is that sales are going to be lower than expected. Well, OK - but then this should be obvious enough. Solar systems are high capital installations which need to be financed. If financing costs go up - if interest rates rise - then fewer people will buy less of these now more expensive solar systems. This is not complex economics, it’s not even complicated accounting.”
#Rising interest rates have increased the relative cost of all renewables installations. We therefore would expect all renewables installation companies to be facing the same problems. Windmills, solar and, to the extent that anyone still builds nuclear, them too. The financing of those capital investments now costs more - therefore there will be fewer renewables installations.
The entire solar and wind sector is facing a fundamental change in the cost structure from rising interest rates. The entire sector is therefore going to see a slowing of demand as a result.
