Solar energy faces stiff competition from nuclear providers

Meanwhile, RBC Capital Markets lowered its rating on Enphase to Sector Perform. The downgrade comes against the backdrop of a solar sector that we know has seen its share of struggles this year and a surge in nuclear investments from big tech. So how should investors be looking at the solar industry? Joining us now is Chris D'Andrinos, analyst at RBC Capital Markets. Chris, it's good to see you. So let's start with this downgrade. Take Enphase to Sector Perform. So moving to the sidelines. It looks like you cut the target to $100, Chris. Just explain this rating change for us. Yeah, sure. So it's a few facets. I guess the principal thesis behind this is really competitive concerns and then a transition in market dynamics for rooftop solar. And so sticking with the competitive piece of this first, we're seeing kind of call it very early signs that perhaps Tesla could be taking share in one of Enphase's largest markets, which is California. And what that does is it's kind of twofold. One is that it takes battery share, which is a big growing segment in California. And the second one is it takes share from Enphase's principal product, which is in inverters. And when Tesla is what they're doing is they're adopting one of their new batteries. It's the Powerwall 3, and that has an inverter and a battery included with it. And so right now with their Powerwall 2, you know, there's a big chunk of that of that share. You actually use Enphase's inverters. So you're losing share there. And then on the market adoption side, we're seeing a transition away from where a homeowner is going to outright own the solar system, and instead they're going to lease it through a company or they're going to do what's called a power purchase agreement, a PPA. And Enphase is underweight that segment as well. So what we think is, you know, when you add all these kind of concerns up, there's probably some pressure on the outlook for next year. Tesla manufactures in the U.S. and that qualifies them for a domestic content adder, which is a cost savings to the installer or to the homeowner. And Enphase doesn't have that at the moment. So, you know, all told, it's a thesis that they're going to see incremental pressure heading into the back half of the year, into next year. And we'd rather be on the sidelines for that situation and watch it play out. So, Chris, if we zoom out and look beyond Enphase, broaden our scope, talk about the rest of the solar industry, I wonder, given some of the dynamics we were just talking about with nuclear, that there's this huge demand from the A.I. companies for what they view as clean energy, and that includes nuclear, but it also includes solar. Do you want to be invested in companies that are maybe more weighted towards corporate development, bigger solar farms or those that service some of these A.I. companies? Yeah, no. And I think that's a great question. And it's been our call all year long that we prefer the utility scale developers. And I think when you look at that market, it's had its own challenges, given, you know, I guess the biggest challenge within the utility segment right now is there's a very long interconnection backlog. So people want to develop the solar or they want to develop the renewables, but they can't because they can't get the connections with the utility. You know, that's caused project delays for everybody across the industry year to date. And it continues to be a headwind. And if you look at some of the forecasts from, you know, third parties, they'll continue to tell you that, you know, utility scale solar could be flat for a number of years on the demand side because you cannot get those connections or there's, you know, limited amounts of labor that are available to help you develop. So, you know, we still favor that sector. We think that demand is extremely strong and it will remain strong, whereas on the residential side, there's there's been demand pressure as a result of higher interest rates and some of the regulatory changes that have made it more expensive. Chris, I'm just curious, given your coverage universe, how are you thinking about potential election risk? Yeah, it's interesting. And I think, you know, our position on it is, is that, you know, a Democrat in the White House is definitely favored. But, you know, there are certain aspects of a Republican presidency that we think could be, you know, an opportunity for certain companies. And the name that I would call out here is is for solar, where they're a domestic manufacturer of U.S. solar panels. They're really basically the only one at utility scale that's doing that. And if you have, you know, a Trump White House or Republican White House where they're more aggressive on tariff policy and U.S. protectionist policies, you know, that favors for solar. And they could they could block everyone else out. They could put in place, you know, larger tariffs on imports. And for solar, that's an opportunity to take a lot of market shares, solidify their position and potentially push prices higher if they so choose. And so we really like the dynamics for for them from that from that position.