SolarEdge (SEDG) mid-quarter review
Let me preface by emphasizing that I am not a techie, and therefore what I am giving on my own inexact impressions, which may definitely include misunderstandings. I know nothing about solar technology. Nothing! Okay,
Who is SolarEdge?
This company was founded in 2006 and is headquartered in Israel, which already adds a certain political and war risk (although the way things are going the war risk seems to be spreading around the world). The company designs and manufactures direct current (DC) optimized inverter systems for solar photovoltaic installations in Israel, Europe, the United States, and internationally. Its DC optimized inverter systems include power optimizers, inverters, and cloud-based monitoring software. Basically, as I understand it, they sell something essential for installing solar panels. And they sell the best of the product that they are selling.
Isn’t solar a risky field to be in?
Heck, Yes! Government subsidies are supposed to expire at the end of 2016. Plus, the falling price of oil has not only killed the oil companies; any company related to solar has been killed too.
What is your history with them?
I’ve been a stockholder for roughly 5 months now. They are just below the middle of my pack, the eighth of fourteen positions.
Don’t technology manufacturers have constant pressure to cut prices?
Yes, the average selling price of their inverters constantly falls but they are confident they can continue to reduce the cost of manufacture faster. They are coming out with new products in the fourth quarter, they also have built a factory in Mexico and are about to start using it, and are installing a fully automated assembly line in their plant in Hungary and have ordered two more automated lines. Each will cut cost 10% and increase quality of the product. They expect to be in EVERY major solar company in the US. The ones they aren’t yet in are testing their products already.
Well, how are their gross margin percents doing? Are they being squeezed?
Last six quarters:
19.6
21.0
21.6
27.6
28.9
29.5
That means their last quarter was 29.5%, up from 21.0% the year before. They clearly aren’t being too price-pressured.
Why is their product best for their customers?
I don’t really have the slightest idea, to tell you the truth, but it obviously is! They just recently appeared on the scene, and for their last quarter their revenue grew over 70%. That’s revenue! And that was a slowdown! The quarter before, off a smaller base their revenue was up over 100%. And they’ve formed alliances with SCTY and TSLA (to supply products for Tesla’s Powerwall), and I respect Musk’s judgment. And they have begun to wholly or partly displace competitors from every major solar company.
Can’t they just be designed out of the next model if someone else comes along with a better solution?
I would think so. But so far there doesn’t seem to be any threat on the horizon. They seem to be pushing their biggest competitor (who was the legacy king of the mountain before SolarEdge came along), out of the business.
How has SEDG stock been doing?
The high was $42.20. I initially bought 5 months ago at $39.50. Since then they’ve fallen as low as $15.50 (!) and they are now at $18.27 with a PE of 19.0 (adjusted). I added on the way down.
Wow, That’s terrible! They are more than 50% off the high! What happened? What did they do wrong?
Well, let’s see! Last quarter revenue was up just 72% year over year, and up 17% sequentially. And adjusted net income was up 482% from $2.8 million to $16.3 million, and adjusted earnings per share were up 500% from 6 cents to 36 cents, and as I mentioned above, adjusted gross margins were 29.3%, up from 21.0%. Earnings the last five quarters as I calculate them (it’s a little difficult as they recently IPO’ed), were 6, 9, 20, 31, 36 cents. (Before that they had losses). When the December earnings are announced their PE will be about 14.5 at the current stock price. Revenue per quarter in millions of dollars has been (rounded off) 31, 45, 67, 73, 86, 98, and 115 last quarter. They obviously aren’t doing anything wrong. It’s the whole uncertainty about the price of oil and the solar industry that’s been killing their stock price.
To summarize
This is a lot more of a risky company than SWKS. It’s younger, it’s much smaller, it’s headquartered in a dangerous place (although it’s scattering its factories around the globe), and it’s in an industry (solar), which will probably grow enormously in future years, but which right now is facing some big worries and headwinds. On the other hand, it has a product that everyone in the industry seems to want and need, and that it keeps improving and coming out with new models of, so that it’s growing incredibly fast.
I hope you found this one interesting, entertaining and useful too.
Saul
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I could not fault you from adding to INFN, but I could find more chart reasons not to add to SEDG.