The solar industry in the US has no doubt been a roller coaster of high expectations and unfulfilled potential over the years, a series of jumpstarts and stalls. And the solar industry has arguably become very politicized with the ups and downs of tax credits at both the Federal and local government levels and the competition with the fossil fuel industry.
The overall cost of installation in the US (i.e. hardware, permitting, etc.) is often cited as a primary reason for comparatively lower rates of adoption relative to the rest of the world, even though the technology has improved significantly.
So picking winning stocks in the space has been very challenging and is not for the faint of heart, especially given the ever-present possibility of major legislative actions which can send stocks tumbling overnight.
But the more acute pressures being placed on the US energy grid, especially the contentious debate around AI data center energy needs, no doubt have some investors asking, “Is this time different? Is this finally the new tipping point for greater adoption and utilization?”
Here we highlight 2 solar microcaps that Zacks recently launched coverage on. Although we are still on the sidelines, we believe both companies are making operational changes worthy of your watchlist.
SUNation Energy, Inc. (SUNE), is a domestic operator and consolidator of residential solar, battery storage and grid-services solutions. Operating in New York and Hawaii, SUNation Energy (SUNE) focuses on acquiring, integrating and growing local and regional solar, storage and energy-services businesses.
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The expiration of the Section 25D residential solar tax credit at the end of 2025 significantly impacted Q1 as revenues declined 43.1% YOY to $7.2 m. And Gross Margin declined YOY from 35% to 22% due to fixed cost under absorption from the decline in sales.
Commercial sales growth and battery storage sales were bright spots for the quarter, somewhat insulating the damage from the residential sales decline.
But importantly, the company recently announced a merger with Suniva, a solar cell manufacturer, for $2.26/share. The proposed merger takes SUNation Energy (SUNE) upstream from an installer and service provider to manufacturing.
So can the new, more vertically integrated entity find cost and revenue synergies between manufacturing and the downstream relationships of SUNE? This remains to be seen but will be interesting to watch after the merger closes.
The other microcap, SolarMax Technology, Inc. (SMXT), is an integrated solar and renewable energy company. SolarMax Technology (SMXT) designs, sells and installs photovoltaic solar energy systems and battery backup systems for residential and commercial customers, provides LED lighting solutions, performs engineering, procurement and construction (EPC) services for large-scale battery energy storage system (BESS) projects, and generates limited financing income from its legacy customer loan portfolio.
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Like SUNE, SMXT is also undergoing a fairly dramatic change in business strategy by focusing more on large-scale EPC contracts for utilities in an attempt to diversify away from the more volatile residential installation market.
Q1 revenue grew 114% to $14.8 m with operating income turning slightly positive vs. a loss from last year. But a history of negative operating cash flow and a sizeable debt load are keeping us currently on the sidelines. Additionally, contract EPC revenue can be lumpy.
Operational momentum and execution are the factors to focus on as these 2 microcaps look to transform their businesses. Despite the prospect of near-term volatility, both businesses can count on a daily sunrise.
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This article originally published on Zacks Investment Research (zacks.com).