Solar stocks have been under pressure in 2023 as the global energy landscape has shifted. The resurgence of fossil fuels, especially natural gas, has made renewable energy sources less competitive and attractive. The rising cost of capital has also weighed on the solar industry, which relies heavily on debt financing and subsidies. In this challenging environment, some solar stocks are more vulnerable than others and investors should consider dumping them before they suffer further losses. Here are three solar stocks that could face a sharp correction in the near or medium term.
JinkoSolar (JKS)
One of them is JinkoSolar (NYSE:JKS), a photovoltaic product developer and manufacturer facing inconsistent margin growth and regulatory risks in recent years. The China-based company saw a boon in sales figures last year, primarily driven by higher demand for solar and other renewable energy products as energy prices globally, especially in Europe and the United States. In fact, JinkoSolar grew revenues 104.6% year-over-year (YoY) from $6.4 billion in 2021 to $12.1 billion in 2022. Quarterly revenue growth in 2023 has remained robust albeit less eye-popping than in 2022. The relatively soft demand in recent quarters is most likely related to what has been plaguing much of the solar market this year: lower non-renewable energy prices when compared to last year.
What can really harm JinkoSolar’s business is the ongoing disputes between Western geopolitical blocs (the United States with Europe) and China. European Union solar panel manufacturers have already begun complaining about the glut of panels made in China, and given geopolitical tensions where they are now, the E.U. could conceivably put restrictive trade measures in place to protect their domestic industry. The E.U. is already mulling over possible tariffs on Chinese electric vehicles (EVs).
Ultimately, investors should remain cautious of investments that could entangle them into conflicts or disagreements between world powers.
Daqo New Energy (DQ)
Daqo New Energy (NYSE:DQ) is another China-based solar stock. In particular, Daqo provides polysilicon, which is sliced into wafers and placed into solar modules, to photovoltaic product manufacturers. The company, unfortunately, has been suffering from both oversupply and price pressure in 2023. In both the first and second quarters of 2023, revenue declined significantly year-over-year. The first quarter saw top-line sales figures decline 42.9% while in the second quarter sales decline amounted to a 48.8% drop.
The glut in the polysilicon market coupled with stalling demand in the global solar market in 2023 could continue to harm Daqo’s growth potential for the near and medium terms. Also, investors need to take the geopolitical considerations noted above into account. If the E.U. or the U.S. faces off again with China in another contentious trade dispute, Daqo’s customers and, thus, its own sales could suffer. The polysilicon provider’s shares have already plummeted 26% year-to-date. Therefore, investors are probably better off steering clear of this solar stock.
Sunnova Energy International (NOVA)
The final entry is Sunnova Energy International (NYSE:NOVA), a residential solar and battery service provider that has been grappling with slowing sales growth, relatively high operating expenditures and a massive debt burden. Like many solar companies, Sunnova experienced significant growth in sales over the past years as secular tailwinds powering the rise of solar boosted demand for its residential products. While revenues have grown, Sunnova’s net losses have ballooned in tandem.
In the first and second quarters of 2023, net losses came in at around $81.1 million and $86.1 million, both of which were more than double the figures for the same periods in the prior year. Sunnova’s high debt burden, which stood at $6.3 billion as of June 30th, also put pressure on the solar panel company’s profitability. In the second quarter, net interest expense represented nearly 15% of total sales.
All in all, while Sunnova’s stock price continues to nosedive, investors should avoid buying the dip, as the potential damage could be severe.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.