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Softening demand means that investors should consider pivoting away from solar stocks, according to Deutsche Bank. The firm downgraded three solar names to hold from buy: SolarEdge , Sunrun and Sunnova . Deutsche lowered the price target for SolarEdge to $150 — implying a 32% potential upside from the stock’s closing price Thursday — from $300. Sunrun’s price target was cut to $15, corresponding to a 42% upside, while Sunnova was trimmed to $12.50 — roughly 36% above its previous close. The downgrades come after SolarEdge said the company suffered “substantial unexpected” cancellations during the third quarter. Those comments, along with SolarEdge cutting its third-quarter revenue guidance, put pressure on the broader solar sector. SolarEdge lost 24% in the premarket. Sunrun and Sunnova lost more than 7% each. The three names have suffered steep sell-offs this year, exacerbated by market growth concerns and rising interest rates in a highly sensitive industry. Sunnova is down nearly 49% in 2023. Sunrun has dipped 56%, while SolarEdge has plunged an eye-watering 60%. SEDG NOVA,RUN YTD mountain SEDG, RUN, NOVA YTD chart Analyst Corinne Blanchard cited for the downgrades an overall decline in demand that may not bottom until early 2024 in the U.S. Although she noted that demand remains strong in Northeastern U.S. states, higher interest rates are more likely to impair demand in Southern states, which she wrote “have historically been more focused on loans vs leases” and are likely to still revise numbers downwards. “We believe 3Q23 earnings will likely be another setback for the solar industry, as sluggish demand continues in the US on the residential side, as well as further signs of weakness in some key European countries,” she wrote, adding that European softness stems from pricing pressure risks and competition from China-based companies. “We believe it will take another 6 to 9 months until we could see improvements and a potential recovery into 2H24.” The analyst also pointed out that pricing pressure remains elevated, and there is high competition when it comes to equipment. Additionally, the companies face a stuffed inventory channel that will likely take at least two to three quarters to whittle down. Earnings season for the solar industry kicks off with Sunnova reporting results on Oct. 25. Blanchard thinks that, even if third-quarter earnings for the industry come in line with analyst expectations, there’s still more room ahead for investors to be disappointed. “Within our coverage, we are cautiously positioned into 3Q earnings … That being said, we could see 4Q numbers guided down vs 3Q depending on 3Q performance — let’s say if 3Q numbers end up at the mid point of guidance, there is then a high likelihood for a disappointing 4Q — with Bloomberg consensus numbers being too high at the moment,” the analyst wrote. — CNBC’s Michael Bloom contributed to this report.
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