The share price of solar energy stocks plummeted yesterday due to fears surrounding interest rates. Following an announcement by US Treasury Secretary Janet Yellen, interests rates are expected to see a slight increase in the near future.
This news was not well received by investors. And consequently, some of the leading US solar energy stocks like Sunrun (NASDAQ:RUN) and Sunnova Energy (NYSE:NOVA) saw their share prices slashed by nearly 10% in a day. Why are rising interest rates particularly bad news for solar companies? And is this a buying opportunity?
Interest rates vs solar energy stocks
The US Treasury has indicated its intentions to increase interest rates as a means to fight inflation. After all, the large amount of stimulus cheques injected into the economy has begun to create problems. For example, commodity prices have been increasing at an accelerated pace.
Interest rates are currently at their lowest point in over 50 years, sitting at around 0.25%. And so, I think an increase is necessary to protect the overall health of the economy. But what does this have to do with solar energy stocks?
The initial cost of equipment for these companies is exceptionally high. And so, to afford the expenses related to buying and installing solar panels, loans are typically taken out and then repaid over a long period of time. So, when interest rates are low, the fees paid on these loans are pretty small. But when they rise, suddenly, the cost of debt goes up.
This ultimately reduces the net profit margin of these businesses as more underlying profit is eaten up by higher interest expenses on loans. Needless to say, that’s not good news for investors.
What’s next for these companies?
I’m not too concerned by this latest announcement. On average, solar energy stocks tend to have an operating profit margin of around 25%. And I think should be more than capable of absorbing the proposed increase in interest rates.
I think it’s also worth noting that the underlying profitability of these businesses has substantially improved over the years due to the falling price of solar panels. In fact, thanks to manufacturing and material innovations, the cost of solar cells have dropped by nearly 75% since 2008.
All things considered, I believe the market may have overacted on the news. And when considering the enormous level of growth achieved by some of these solar energy stocks in 2020, the large volatility in share prices is not too surprising.
Personally, I think the sudden fall in prices presents a potential buying opportunity for my portfolio.
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
