Shares of clean energy leaders QuantumScape (QS 4.35%), SolarEdge (SEDG +13.47%), and Sunnova Energy (NOVA +0.00%) plunged on Tuesday, falling 4.4%, 10.5%, and 3% through Tuesday trading.
QuantumScape is an early-stage next-gen electric vehicle (EV) battery producer, SolarEdge is a rooftop solar inverter company, and Sunnova is a solar energy services company that offers long-term power production agreements (PPAs) to clients.
There are some commonalities among the three companies: Each is highly levered to the adoption of clean energy technologies, and each is losing money at the moment, and is therefore highly sensitive to long-term interest rates.
Unfortunately, both of those factors have gotten worse with the election of Donald Trump, with long-term interest rates making a particularly big move higher today.
NASDAQ: QS
Key Data Points
Long-term rates may be the biggest risk
Today, long-term interest rates as dictated by the 10-year Treasury bond rose over 12 basis points, reaching a yield of 4.433% as of 3:14 p.m. ET. Of note, long-term rates have been rising over the past month, and are also incrementally higher since the election. While interest rates had been coming down earlier this year, the prospects of potentially lower taxes and higher tariffs from a Trump administration have raised the possibility for inflation growth, and therefore long-term rates.
Higher interest rates have absolutely decimated both the solar and electric vehicle industries this year. Both rooftop solar and autos are big-ticket items that are usually financed, so higher rates are really bad for both industries. Therefore, it's not surprising to see all three stocks lower on higher long-term rates today.
Additionally, all three stocks have struggled since the election of Trump and Republicans to Congress last week. The thinking is that Republicans may try to repeal the Inflation Reduction Act incentives for both rooftop solar and electric vehicle incentives.
However, that second threat may be a bit overblown. Many of the IRA incentives have disproportionately gone to red districts, with 18 Republican lawmakers recently writing Speaker Mike Johnson to warn him against a full repeal of the incentives. Moreover, having Elon Musk as a big Trump booster and donor may mitigate the impact on electric vehicle incentives.
Still, a higher-rate environment could be a severe headwind for each of these companies, even if IRA incentives remain intact.
Image source: Getty Images.
While QuantumScape recently reached a big landmark, shipping its first anode-free solid state battery for customer testing, the company is still largely pre-revenue and burning through cash every quarter. While recent cost cuts have extended the company's cash runway to 2028, according to management, any sort of equity raise would become more dilutive, or a debt raise would be more expensive in a higher-rate environment. Having burned through $110 million last quarter alone, QuantumScape is on the clock to find commercial adoption of its next-gen solid state battery cells.
The situation is also quite dire for SolarEdge, which has seen its revenue implode and profits turn into losses over the past year. Higher interest rates and a changing regulatory landscape have decimated its market for rooftop solar, especially in Europe. Revenue fell a whopping 64.1% last quarter, with gross margin deeply negative. While SolarEdge does have a bit more cash than convertible debt, if its current pace of losses keeps up, it may have to raise more money, which would, again, be costly to shareholders in a higher-rate environment.
The same type of phenomenon goes for Sunnova, which is more of a services company than a hardware company. Still, Sunnova's financials are sort of akin to a financial company, as it installs solar systems and then collects revenue under long-term PPAs. A higher rate environment and potentially lower fossil fuel prices may limit demand for its solar services, but higher long-term interest rates will also decrease the value of long-term fixed cash flows from PPAs.
And of course, as none of these three companies are profitable, a higher long-term interest rate will also lower the present value of each company's theoretical cash flows well out into the future, even if each does manage to become profitable at some point.
There may be opportunities in clean energy tech, but these three look dicey
The recent sell-off in all things clean energy could lead to some bargain-priced opportunities. Certainly, QuantumScape's product milestone bears watching, as that has the potential to revolutionize electric batteries.
However, it's probably prudent to look for bargain clean energy opportunities in healthier companies that are at least earning profits today, or close to doing so. The possibility of rapid change in the interest rate environment or a less hostile regulatory environment is probably not a bet you'd want to make in clean energy stocks right now. Unfortunately, each of these three seem to need those elements to change -- the sooner the better.
