Cleantech 3Q23 Recap & Outlook

None of this should be construed as investment advice and all opinions are my own personal macro observations. None of the below consists of independent stock opinions nor will I ever provide that.

After a turbulent earnings season for cleantech, I thought I’d write this post as a follow up to my prior post about what’s going on with renewables stocks YTD. In 3Q23, many cleantech subsectors continued poor performance with execution issues, guidance cuts, and weaker near-term outlooks. For many names with mixed or negative performance, there was further pressure on stock prices on top of already significant YTD weakness. Street estimates are moving lower and valuations continue to compress. However, the rate-sensitive nature of these names continues to be an interesting dynamic as many names jumped up the past few days on bullishness around better inflation data and a more favorable outlook on rates.

While the near-term outlook and sentiment for many cleantech names has weakened, the multi-year, secular tailwinds (e.g., move to renewables, electrification of everything, decarbonization of the economy) are still intact even though their trajectories will be modified to resemble a more realistic pace for the energy transition. As sellside adjusts estimates downward and move to more reasonable valuation frameworks relative to the 2020-2022 period, favorable setups may emerge in the coming quarters as end markets recover and investors build conviction that end markets conditions have bottomed out.

General Commentary:

• Notable cleantech “safe-haven” stocks (e.g., Orsted, NextEra, SolarEdge, Enphase, Siemens Energy) underperformed significantly in recent months (-53%, -25%, -73%, -44%, -54% 6M performance, respectively)
  • Higher cost of capital and idiosyncratic subsector issues has challenged the clean energy sector broadly but don’t/won’t impact all players equally
• Increased competition and changing state/federal policies pose challenges to distributed solar space, calling for increased stock selectivity vs. thematic exposure
  • Residential solar sector faced a challenging quarter with guidance cuts, sluggish demand, and high investor scrutiny with an anticipated recovery taking in 6-9+ months in both the US and Europe (ex: SEDG, ENPH, SPWR, RUN, NOVA)
  • Despite higher rates, some operators called out that large-scale renewable projects remain economically favorable in many parts of the US
    • Utility solar sector performance was mixed, with some companies executing well on new bookings and order growth while others struggled with building backlog, executing against existing pipeline, or had one-off product issues (Better – FSLR, NEE, CWEN, NXT vs. Worse – ARRY, SHLS, AMRC)
    • NEE claimed solar levered returns in the mid-teens remain unchanged while wind and storage returns are now above 20% (previously storage was in the upper-teens and wind in the high teens to low-20s range)
• Slowing EV penetration in western markets led to lowered forecasts or delayed investments (e.g., TSLA, F, GM), which impacted the value chain (e.g., semis―ON, suppliers – APTV or BWA, etc.) but growth led by Asian markets (namely domestic Chinese OEMs) provided better outlooks for players with global footprints
  • Lithium experienced significant volatility in 2023 YTD with a weak near-term outlook as APAC battery makers have mostly flat/declining production and weaker commentary heading into 4Q23 and 1Q24 (ex: Panasonic, LGES, CATL, EVE, CALB)
  • Investors are monitoring Chinese EV demand/battery production for further slowdown signs (broadly negative for ALB, LTHM, SQM, etc.)
• Specialty contractors were also mixed as investors increasingly focused on exposure to high quality renewables and T&D projects and honing in on project delays (Strong performance of PWR and TTEK vs. weak performance of MTZ)
• Wind was mixed with some companies calling out project cancellations and rising development costs (e.g., Orsted) whereas others delivered better margin performance (e.g., Vestas)
• Renewable fuels gained attention with progress on blue/green ammonia projects and ammonia (e.g., APD, KBR), but some operators called out higher project cost estimates
  • RD and SAF discussed among refineries and bio-diesel companies despite D4 RIN price collapse while D3 RIN prices have increased, which is positive for RNG producers (e.g., waste companies like WM and RSG)

This is an approximate exercise given subjective bucketing (see below) and different reporting schedules, but an illustrative look at US-based cleantech universe:

• YTD performance pre-earnings before latest announcement date
• 1D pre-announce to 1D post-announce performance
• Performance from 11/14-11/15 to illustrate the impact of the “stable/lower rates” trade
  • Note: a lot of this was likely short covering as well, with many of these stocks giving back performance today

*Buckets can be found below

YTD Performance: Clean Energy and Solar Indexes vs. S&P500 and MSCI ACWI:

• While the S&P500 and MSCI ACWI are up mid-teens % YTD, clean energy indexes are down -30 to -40%
• Valuation for the clean energy indices was a significant premium through 2020-2022 and now has de-rated to being at a discount to the S&P500 and MSCI ACWI

*Sector Buckets: