What to expect from alternative energy stocks in 2024, according to KeyBanc

Renewables underperformed in 2023 due to a poor macro setup and greater interest rates impact than KeyBanc had anticipated, the firm has told investors. While the change in the Fed’s stance at the end of 2023 helped lift the space off of the lows, the firm fears that this rally won’t be sustained and is cautious on the space going into 2024. In this context, KeyBanc is moving to the sidelines on Enphase (ENPH) and Sunrun (RUN).

2024 OUTLOOK: The renewables index underperformed the S&P 500 in 2023, with high interest rates impacting project returns and poor investor sentiment increasing selling pressure across the space, KeyBanc notes. While the change in the Fed’s stance at the end of 2023 helped lift the space off of the lows, the firm fears that this rally won’t be sustained and is cautious on the space going into 2024.

Looking across all the drivers impacting the space, it sees more headwinds than tailwinds, on balance, outside of interest rate impacts which remains almost the sole positive driver. Specifically, KeyBanc sees solar equipment space facing pricing pressures and inventory gluts, less than ideal treasury guidance with respect to IRA incentives and the overall fading of the enthusiasm around it, as well as falling power prices in the U.S. and in the EU, which both eat into renewables relative economics and remove the sense of urgency in the EU specifically as the energy crisis there abates. In addition, the U.S. elections in 2024 present a material risk and overhang on the space, in the firm’s view.

Declining interest rates and equipment inventory glut are both positives for downstream players including residential installers Sunrun and Sunnova (NOVA), as well as Hannon Armstrong (HASI), which participates in the space financially, KeyBanc says. On the other hand, equipment manufacturers such as SolarEdge (SEDG) and Enphase appear to have their hands full with inventory issues for the time being, and the firm fears that by the time they have worked through it the election overhangs will dominate the headlines, resulting in an overall unfavorable setup for these names in 2024. Tracker companies such as Next (NXT) appear to be most stable in terms of fundamental positioning, but KeyBanc does not expect them to be immune to the political risks facing the space.

The only domestic solar manufacturer of significant scale, First Solar (FSLR), appears well positioned in the near-term due to its sizable backlog that extends into 2025/2026. However, with the collapse of global PV prices, the medium-term outlook for First Solar’s pricing is uncertain, in the firm’s view. Lastly, Bloom Energy (BE) appears well-positioned to capitalize on the growing demand for clean power from grid-constrained C&I customers and KeyBanc continues to recommend that name.

MOVING TO THE SIDELINES: KeyBanc downgraded Enphase Energy to Sector Weight from Overweight without a price target. The firm believes the timing of recovery in demand is uncertain due to a “poorly quantifiable inventory glut in the channel.” The issue has persisted for much longer than the firm initially anticipated, and the visibility there is low, including for the management team itself, KeyBanc argues. The firm sees the window for the stock to “work” as narrow in 2024.

KeyBanc also downgraded Sunrun to Sector Weight from Overweight without a price target, citing the recent valuation rebound for the downgrade. After the recent change in the Federal Reserve’s interest rate stance, Sunrun staged a mini rebound, lifting off of the lows. Following this correction, the firm notes that Sunrun trades significantly closer to its net asset value. Given its overall negative stance on the space, KeyBanc prefers to stick to the more discounted name, Sunnova Energy, as its sole Overweight in the space.