Solar power equipment makers are about to hit a rough patch, and it's time to sell many stocks in the space, according to Goldman Sachs.
Demand for solar power equipment is drying up in key markets just as supplies are booming, the investment bank warns. The industry has long been governed by boom-and-bust cycles, and Goldman thinks a looming glut of solar modules is pushing the sector into a downturn.
"Against this backdrop, we see both volume and pricing risk intensifying in the near-to-medium term, and now forecast 0% average upside across the group," Goldman said in a research note.
The catalyst for its downbeat view is last week's major policy shift in China. Beijing has suspended subsidies for large-scale solar farms for the remainder of 2018 and will require these plants to set power prices in competitive auctions.
Goldman now expects a 40-percent drop in sales volumes in China, which accounts for half of the global market for solar modules and other equipment. Heaping more pressure on the industry are anticipated declines in other key markets like Japan, India and the United States, where the Trump administration has dented demand by slapping tariffs on imported solar panels and modules.
Renewable energy companies have scrapped or suspended plans worth more than $2.5 billion to install solar panels since Trump imposed the tariffs, Reuters reported on Thursday.
Overall, Goldman anticipates a 24 percent drop in solar installations around the world this year. Meanwhile, it expects supplies across the entire supply chain to rise by 12-32 percent, with big increases of 24-32 percent in the segment that manufactures individual solar cells.
"To put this into perspective, at current 4-4.5 g/W conversion rates, this would imply 25-35GW of new supply potential vs. what we now forecast to be a roughly 25GW decline in yoy demand," Goldman said.
Solar modules and cells will probably fetch about 15 to 30 percent less than they did for manufacturers last year, according to Goldman.
Those forecasts led Goldman to take a more bearish view of solar manufacturers exposed to the Chinese market and firms throughout the supply chain.
The bank slashed its 12-month price target for JinkoSolar, which earned 37 percent of 2017 revenue in China, from $15 a share to $10. The stock fell 3.4 percent on Thursday, bringing its one-week loss to 34.2 percent.
Shares of First Solar plunged 5.5 percent after Goldman slapped a "sell" rating on the stock and slashed its target from $75 a share to $48.
Canadian Solar maintained its neutral rating with the bank, but had its target knocked down from $18 to $13. Shares were down nearly 2.7 percent in afternoon trading.
However, the cyclical factors that will buffet those stocks could boost companies that sell solar energy to residential users by reducing equipment prices. The bank recommends exposure to Sunrun and Vivint Solar.