Contractors installing Sunrun solar panels on the roof of a new home at in Sacramento, Calif.
David Paul Morris/Bloomberg
Solar stocks fell sharply on Tuesday after California proposed new rules that would make it more expensive for homeowners to generate power from panels on their roofs. But one analyst thinks that the selloff was too steep and that the stocks of solar developers are now discounting a future that seems too bleak.
The California Public Utilities Commission proposed that homeowners who install solar roofs pay a monthly grid fee that could come to about $40 for the average roof. And the payments solar owners would get for sending power back to the grid when they’re not using it would decrease.
All in all, the value proposition of owning solar would become less attractive, and several analysts said that homeowners might balk at adding panels. Solar developers Sunrun (ticker: RUN), SunPower (SPWR) and Sunnova Energy International (NOVA) all fell more than 10% on Tuesday, and were down again — though less sharply — on Wednesday.
But J.P. Morgan analyst Mark Strouse argues that Sunrun and Sunnova are attractive buys at current levels because investors are no longer giving them much credit for their growth prospects. (He rates SunPower at Underweight, noting that the company’s execution has been spotty in the past.)
“We look at Sunrun and Sunnova’s valuation compared to their existing portfolio of operating assets,” Strouse wrote. “For both stocks, the multiple is now about 25% lower than the average for the past year. Said another way, excluding the value of existing operating assets, the stocks are assigning about 50% less value to future growth than the one year average. We believe California represents about 40% of Sunrun’s growth and about 20% of Sunnova’s, so a 50% decline in the valuation of future growth seems overdone, even in a worst-case scenario for the California market.”
Solar stocks have fluctuated considerably, sometimes because of government policies. Sunrun is down 50% this year and Sunnova is off by 36%, but both stocks more than quadrupled in 2020. Strouse thinks Sunrun can rise to $86 from a recent $35, and that Sunnova can climb to $66 from a recent $29.
One reason Strouse thinks investors shouldn’t be so gloomy is that the California proposal may not be adopted as currently written. In fact, the commissioner who issued it is leaving before the end of the new year, and a replacement could be more favorable to the industry.
“We also expect a media blitz by local politicians and solar industry participants, which could result in a final determination with more favorable terms,” Strouse wrote.
He also thinks homeowners can work around the rules, perhaps by adding battery storage to their solar systems to disconnect from the grid. Battery systems are one of the biggest growth opportunities for solar companies.
Write to Avi Salzman at [email protected]
