Grey Skies for Invesco Solar ETF

The Invesco Solar ETF fell over 10% last week as top holding SolarEdge reported that demand in Europe for solar equipment is falling; Enphase’s share price also fell as a result. High interest rates and inflation continue to weigh on solar, but First Solar stock is holding up better than its rivals.

• The Invesco Solar ETF has plunged over 10% in one week.
• Share price of SolarEdge crashes 27% overnight after it reports dwindling European demand.
• Despite sector pressures, a September report predicts solar capacity will be up 52% this year.

The Invesco Solar ETF [TAN] has plunged 10.3% in the past week, reaching its lowest level since July 2020, as solar stocks crashed.

The sharp fall came after SolarEdge [SEDG], the third-largest holding in the TAN portfolio as of 20 October, said demand for solar equipment is significantly declining in Europe. SolarEdge’s share price reacted by tumbling 27.3% to the close on Friday 20 October, while the second-largest holding in TAN, Enphase Energy [ENPH], also slid 14.7%.

The TAN fund offers exposure to 47 companies in the solar energy sector, and is based on the MAC Global Solar Energy Index. The first thematic ETF to focus on solar, it launched in 2008.

As of 20 October, TAN is mostly weighted towards companies in the field of information technology (57.4%), followed by utilities (20.3%), industrials (16.0%), financials (3.3%) and materials (2.7%). Geographically, 50.9% of its holdings are US-based companies and 21.0% are China-based, with several other countries including Germany and Spain accounting for- percentages of less than 6%.

TAN has plummeted 39.8% year-to-date.

Solar Stocks Downgraded

The top holding in TAN’s portfolio is US solar panel maker First Solar [FSLR], with a 10.4% weighting. In July, First Solar reported increased net sales of $811m in the second quarter, a rise of 47.7% from the prior quarter. It also announced news of a potential $1.1bn investment in a US facility for making its next-generation Series 7 modules.

While the earnings report gave the company’s stock a 5% boost in July, shares have risen a modest 0.7% so far in 2023, and are flat across the past week. However, earlier in October, FSLR was upgraded to a ‘buy’ by Barclays analysts, who said it offered an “attractive entry point” for solar investors.

The second-largest holding in the Invesco Solar ETF is Enphase Energy, with a 10.4% weighting. The company specialises in solar panel systems controlled by microinverters.

In July, Enphase reported Q2 revenues of $711.1m, a year-over-year increase of 34.1%. Non-GAAP diluted earnings per share of $1.47 were up 37.4%.

However, last week, Scotiabank downgraded its rating on Enphase stock to ‘sector perform’ from ‘sector outperform’ and slashed its price target from $180 to $140. Tristan Richardson, Scotiabank Managing Director, wrote in a note: “[It’s] difficult to see a path to marked and sustained improvement in the macro environment over the next two to three quarters."

Meanwhile, third-biggest holding SolarEdge last week revised its outlook for Q3, saying it forecast revenue, gross margins and operating income below analyst predictions, with “significantly lower” revenue for Q4.

It said adjusted margins will be 20.1%–21.1%, where it had previously forecast margins of 28%–31%. CEO Zvi Lando blamed “substantial unexpected cancellations and pushouts” of European backlogs, partly as a result of slow installation.

The SolarEdge share price has plunged 70.7% so far this year. Richardson of Scotiabank on 19 October also cut his target on the stock to $170 from $345.

The company is set to report Q3 earnings on 1 November.

Less-than-sunny outlook for solar?

A September report by the Solar Energy Industries Association and Wood Mackenzie anticipates that the US will add 32 gigawatts of new solar capacity this year, a jump of 52% from last year.

Despite this, right now things look less than rosy for solar. Macroeconomic factors including high inflation and soaring interest rates have dragged down solar stocks Investors are reported to have withdrawn £292m from the TAN fund so far this year as confidence dips.

SolarEdge’s news triggered further turmoil for a sector already under duress — all of which may be bad news for TAN’s performance.

However, the sun may yet shine again for solar. At TipRanks, TAN is rated a ‘moderate buy’ with 20 out of 42 analysts recommending to ‘buy’, 21 to ‘hold’ and one to ‘sell’ the fund.

Despite SolarEdge’s woes, at CNN Business, 30 analysts giving 12-month price targets for SEDG have a median target of $145, which represents 75.1% upside from its last close. A majority 20 out of 36 analysts still rate the stock a ‘buy’.

Out of 39 analysts, 20 recommend investors ‘buy’ Enphase stock at CNN Business, and 17 out of 30 analysts also recommend they ‘buy’ First Solar shares.