Solaredge: Strong Long Term Prospects
Updated: Dec 6, 2021
Solaredge(SEDG) stock has suffered in response to 3Q Earnings.
Logistical and Supply Chain issues held back performance.
Company is well positioned for global growth and new products.
High valuation but low compared to competitor Enphase (ENPH).
Entrance into S+P 500 may help short term perfomance.
Solaredge, with headquarters in Israel and manufacturing and distrtibution in Israel and other international locations, is a strong performer in various areas of solar power. It is one of Israel's largest company by market cap. Solaredge's primary business is solar inverters which transform power from solar units to ac power that is used in electricity for home and industrial uses in countries around the world. It has also expanded through acquisition and internal growth to enter the power backup and batteries.
Obviously Solaredge is riding massive tailwinds in demand for solar energy. In fact, the growth in solar energy in Asia and Europe is faster than in the US. In the US residential market there is basically a duopoly betweet it and Enphase (ENPH).,Solaredge's growth is worldwide. in fact,, their growth rate is larger outside the US. It also has more commercial products particularly in larger commerical installations and plans aggressive expansion in that area.
Solaredge is moving aggressively into other areas including batteries and components for electric vehicles. It already has a contract with Stellantis in mobility products. This graphic from their quarterly presentation shows the products it is developing outside of its current core business. None of these areas is a significant source of revenue currently leaving large upside contributions to revenue in future years.
3Q Earnings Report
SolarEdge Technologies last announced its earnings data on November 2nd, 2021. The results were slightly below analyst expectations.
Reported $0.96 EPS for the quarter, missing analysts' consensus estimates of $0.99 by $0.03.
Revenue was $526 million vs $480 the previous quarter and revenue in Q3 2020 $338 million, Non solar business accounts for only a bit over 10% of revenues.
Gross margin is over 32%.
Non gaap profits were $95.2 million vs $81.3 the previous quarter and $50 mln is 3 Q 2020.
Earnings for SolarEdge Technologies are expected to grow by 49.71% in the coming year, from $3.46 to $5.18 per share.
Covid Troubles for Solaredge
The company gave a cautious approach to future guidance, guiding to little or no growth because of logistical issues related to covid. From the earnings call:
"....due to the shutdown of our factory in Vietnam in the third quarter and its gradual return to normal operations and in light of the strong demand, our fourth quarter guidance is for moderate growth at temporary reduced gross margin.
As such, for the fourth quarter of 2021, we are guiding revenues to be within the range of $530 million to $560 million.
Revenues from the solar segment are expected to be within the range of $490 million and $515 million. In the fourth quarter, we expect to ship approximately 70-megawatt hour of residential storage systems to the United States and Europe as we continue to ramp the manufacturing of this product.
We expect non-GAAP gross margin to be within the range of 30% to 32%. Gross margin for the solar segment is expected to be within the range of 31% to 34%..
The manufacturing, supply chain and logistical issues were headwinds. The manufacturing facility in Vietnam was closed for 12 weeks . In contrast to competitor Enphase Solaredge did not pass on the increases in supply chain materials. On the more positive side Solaredge reported that it has record backlogs in orders.
Stock price. SEDG stock lost 11% in value in the wake of the earnings report doubtless in response to the difficulties related to logistical issues. The further downtrend in recent days has put Solaredge at $307 well below its 52 week high of 389 a decline of 21%. As a point of comparison Enphase is also well below its 52 week high of $282 now at $217--a 23% decline.
SEDG is often compared to ENPH since both are the main competitors in the US residential market. ENPH has not encountered the logistical issues of Solaredge and thus had better results for the quarter and sees continued growth going forward at a far higher rate than SEDG. But the market is demanding a high premium for ENPH vs. SEDG. This gap in valuation has existed consistently as can be seen in the graphs below. Some of the explanation to the difference may be Enphase's stronger and more visible presence in the US market despite SEDG's strong global presence. Up to now only Enphase has been part of the S+P 500. It also has a higher weight in clean/solar energy ETFs. There is doubtless considerable momentum trading due to Enphase's massive outperformane vs. Solaredge in 2022.
Price and P/E:
Price to Sales:
On December 4 S+P announcedt that Solaredge will enter the S+P 500. This is generally a short term positive as indexers and "closet indexers" will need to add the stock to their portfolios. In after hours trading (in a Friday P.M. market) the stock rose 3%. Enphase has been in the S+P 500 since December 2020.
Obviously the near term future is uncertain for SEDG as it works through its logistical issues and certainly no one can predict the future course of the pandemic. However, Solaredge has made adjustments in its manufacturing and is carrying a large backlog in orders.
Consensus analyst forecast for the stock is $380. All price targets by analysts since the earnings report have been upward revisions.
A version of this article also appears on Seeking Alpha