SolarEdge
Technologies Inc. (SEDG, $269.46): “Something to Take the Edge Off”
By: Dan
Dunn, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
- SolarEdge
Technologies (NYSE:SEDG) develops alternative energy technology
through its solar power solutions. Their main inverter segment drives solar revenue
from the mainland U.S., Netherlands, Europe, China, and Russia. SEDG is
headquartered in Herzliya, Israel.
- SolarEdge has continued to make strides with product penetration. Earnings for Q2 stated a third consecutive quarter of strong growth, with total revenue 18% higher than Q1. European sales reached a new high of just over $200 million, and U.S. pulled in $175.1 million, beating market expectations.
- Non-solar technology continues to develop, with powertrains leading sales numbers on the e-mobility front. The non-solar revenues were $80 million. Storage beginning to be paired with inverter sales for installers.
- Supply chain struggles have been mitigated through SEDG’s multiple store strategy, but takes losses through higher cost logistics at times. Component shortages continue throughout the technology industry, but management dismissed negative impacts on ability to meet increased demand.
- Production in Vietnam was drastically reduced due to COVID impact, leading to necessary increases of production from plants in China, Hungary and Israel. Additional Chinese shipments to the U.S will negatively impact margins until conditions improve.
- Expected bipartisan infrastructure bill can continue to drive stock price as the Biden administration focuses on cleaner energy and reduction of carbon outputs, as well as an expected emphasis on EV expansion.
Key
points: SolarEdge continues to rapidly grow sales, both in Europe and
in the U.S. Strong Q3 numbers and confident management adjusts revenues guidance
for Q3 to $520-540 million, with the solar segment between $460-480 million.
Margins are expected to be within 32-34%. While the company has confidence that
they stay a leader in market share, management has difficulty identifying hard
evidence in a rapidly growing environment. Ultimately, faith has been put in
installers (customers) that will continue to sell the products to residential
and commercial buyers. Continued exposure to these installers is expected to
help lateral product penetration.
After a fairly aggressive 2019, acquisitions
have cooled off as SEDG builds its product portfolio to support its inverters. Storage
and EV support have become a research focus, as well as the continued
integration of their software application to monitor solar inverters. As global
markets continue to expand for energy storage, any continued growth in this
segment will drive investor confidence.
SEDG recently added a new chief
of marketing, as well as new CEO for their Kokam subsidiary. Yogev Barak takes
over as marketing head, after a 25-year career with executive positions for HP
and Applied Materials. SehWoong Jeong takes over for Kokam after leading the
Automotive Batteries and ESS for Samsung SDI.
Risks continue to surround the
company’s customer base, with 2 customers making up more than 10% of revenue
from the U.S., and the top ten clients providing more than 60% of total
revenue. Competition could become a real danger here, as the demand for solar
energy support will continue to grow.
What
has the stock done lately?
The stock has stabilized a bit in
the last few months compared to the incredible run over the previous few years.
The stock is down over 17% YTD after hitting a markable high of $371 in
January. This was followed by a substantial sell-off, and the price has settled
between $270 and $290 for much of the year.
Past
Year Performance: SEDG is still considered undervalued by the
market, with the majority of price targets close to $330. High volume numbers
have driven a volatile few years, and there is little surprise to see a sell
off after the all-time high of $370.
My
Takeaway
SolarEdge will benefit greatly
from the passing of the infrastructure bill, as renewable energies are prioritized,
and expansion becomes further subsidized. The demand for residential solar
backups should continue to grow, especially when improving technology combines
with the stressors that grid systems will have to manage during the EV revolution.
Fears of attempting innovation too far outside SEDG’s comfort zone with their
non-solar segment may deter investors if they continue to finish in the red.
Revenues should see massive increases as solar technology becomes mainstream
over the next 5 years. The AIM International Equity Fund should continue to
hold its larger position at the very least through the final stages of the
infrastructure bill.
