The solar energy industry has faced a tough year in 2023, with solar stocks experiencing a downward trend after an initial boost from the Inflation Reduction Act in 2022. The Invesco Solar ETF (Exchange: Ticker), which had seen an impressive rise of 233.6% in 2020, is down by over 25% year-to-date and has remained largely flat over the past three years. Yet, the solar industry's long-term growth potential remains robust, attracting investors to promising segments within the sector.
A global price war among solar panel manufacturers has negatively impacted the industry but has also benefited project operators due to reduced panel costs. However, higher interest rates have decreased the return on investment for utility-scale solar projects and deterred residential buyers from installing rooftop solar by extending the payback period on their initial investment. Geopolitical disruptions have also led energy-dependent countries to lean towards oil and gas resources, adding further pressure to the renewable energy sector.
Despite these challenges, investors continue to show interest in the Invesco Solar ETF. The fund offers a balanced mix of renewable energy equipment and information technology companies such as Enphase and SolarEdge (NASDAQ:SEDG). It also includes more than 37% of utilities and industrial companies, with over 45% of the fund allocated to companies outside the United States, providing exposure to international markets like China, Germany, and Spain.
Enphase and SolarEdge represent the largest and third-largest holdings in the fund respectively, accounting for nearly 20% of the total fund's holdings. Despite significant sell-offs, both companies have maintained solid fundamentals with stable margins in what has been a challenging period for the solar inverter and power optimizer market, particularly in Europe.
Despite potential slowdowns and margin pressures, both Enphase and SolarEdge offer value to investors who believe these companies can maintain their high margins and growth over time. Even with their current lower valuations - Enphase at a 23.4 forward price-to-earnings ratio and SolarEdge at 14.7 -, these stocks may start to look attractive if growth returns and margins remain stronger than expected.
For those considering an investment in the international solar industry, the Invesco Solar ETF remains a strong option. However, a split investment between Enphase and SolarEdge could prove to be an even more strategic move. Both companies have demonstrated strong fundamentals and have thus far resisted price wars, competition, and margin compression. Despite recent setbacks, these stocks are now more affordable than they once were. Patience may be required as conditions could worsen before they improve, but now could be an opportune time for a closer look at Enphase and SolarEdge.
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