SolarEdge Stock: A Global Solar Energy Leader
Whenever the Israel topic comes up, we try to tread lightly. As famed American philosopher Louis C.K. once said, “Jew” is the only word that can be derogatory or descriptive, just based on tonal inflections. Most people’s knowledge of Jews probably extends to the funny-looking people seen walking around New York airports. Those are Hasidic Jews who make up about 5% of the Jewish population. Then you have Ashkenazim who are the majority of Jews, and happen to be some of the smartest people on this planet – studies have shown. But that breaches the topic of genetic intelligence, and now that everyone’s starting to squirm in their seats, we’ll quickly change the subject.
Jews aside, Israel is remarkably successful for a country with just 9 million people. With more than 85 companies trading in the U.S with a combined market cap of $300 billion, only China and – of course – America – have more companies trading in the States than Israel. One Israeli success story we’re going to look at today is SolarEdge (SEDG).
Searching for Solar Stocks
The solar investing thesis has been tough to navigate over the years. If you invested in the only solar ETF out there – the Invesco Solar ETF (TAN) – when it debuted on May first 2008, you would be holding that position at a 78% loss right now. If you invested in TAN 10 years ago, you would have only realized a +191% return compared to a Nasdaq return of +332% over the same time frame. But an investment in TAN five years ago would have netted you a gain of +268% vs a Nasdaq return of +118%. It’s one of the rare cases where the old saying, “it’s about time in the market, not timing the market” doesn’t appear to hold true.
We’re currently holding TAN and looking to exit the position for no other reason than we don’t want to hold any ETFs in our disruptive tech stock portfolio. Given solar is expected to grow at a faster clip than any other renewable energy, we vetted The 10 Biggest Solar Stocks in the World and shortlisted two stocks – Enphase and SolarEdge. The former isn’t a stock we’d consider holding based on risks we outlined in our recent piece on The Big Solar Debate: SolarEdge Stock Vs Enphase Stock. That leaves us with SolarEdge.
About SolarEdge Stock
Let’s start with some of the risk factors we’ve identified so far.
- SolarEdge says 30.9% of 2021 revenues come from two distributors – Consolidated Electrical Distributors (CED) and Sunrun (RUN).
- The company doesn’t provide any color on their exposure to utility solar vs. residential solar. According to a piece by Morningstar, SolarEdge is said to be evenly split between residential and commercial.
- SolarEdge has an opaque business model which doesn’t reflect the sort of recurring revenues we like to see when demand for hardware dries up.
Starting with the first bullet point, end customers and distributors represent two types of risk. A distributor disseminates products to a multitude of end customers who drive demand for those products. Consolidated Electrical Distributors (CED) is one of the largest privately owned electrical distributors in the United States with 700 locations, while Sunrun is “an American provider of residential solar panels and home batteries” and the largest residential solar installer in the United States since their acquisition of Vivint. From our perspective, CED would be considered a distributor, while Sunrun wouldn’t. This means our customer concentration risk concerns lie mainly with Sunrun. If we assume they constitute half of that concentration at 15% then that’s not overly problematic. Presumably that will decline over time as SolarEdge expands globally.
Regarding utility vs. commercial vs. residential, check out the below slide from a recent SolarEdge investor deck.
The company’s strategy is to reduce their reliance on residential – a product portfolio that they perceive as complete – and focus on growing commercial and utility. This aligns with our desire to hold a solar company that’s diversified beyond just residential. Now, let’s talk about our most important point of contention – the need for recurring revenues once the solar investment boom subsides.
A Solar Gold Rush
In looking at solar as an investment thesis, our biggest concern lies in what happens to solar hardware manufacturers when the infrastructure boom ends and demand dries up. According to an estimate provided by SolarEdge, solar power will represent 38% of all power generation globally by 2050 (followed by wind at 20%).
Given the predicted 25-year lifespan of the inverters and optimizers sold by the company, this works out quite well. Since SolarEdge sold $1.656 billion worth of inverters and optimizers in 2021, we can expect replacements to be ordered in 2046 which – adjusting for inflation – should provide another growing revenue channel over time. In a perfect world, the solar infrastructure boom will tail off right when demand for replacement hardware starts picking up. Since SolarEdge provides free monitoring software to their clients for 25 years, the timing is just about right.
- SolarEdge: Looks like your 25-year free trial is coming to an end and it also looks like your hardware is quite old. How about we replace all that old equipment for you and extend that free software trial another 25 years?
- Customer: Sounds like a plan
Growing revenues with replacement hardware is one scenario for growth beyond the solar gold rush, but there’s no need to wait until then. SolarEdge has defined a number of segments they plan to expand into which they currently ball up into a category called “All other” which includes the design, development, manufacturing and sales of energy storage products, e-Mobility products, UPS products, and automated machines. Eventually, one would expect these additional segments to be broken out once they achieve meaningful growth which seems to be coming. The “All Other” segment grew by 71% in 2021 reaching just over 10% of total revenues in 2021 (it’s referred to as “non-solar” in the below chart).
Investors will want to keep a close eye on how this segment grows over time as it provides much needed revenue diversification for the company.
Buying SolarEdge Stock
Someone once asked if it’s best to buy before earnings calls or after and we believe the latter is the appropriate choice. That’s because today’s tech investor is increasingly demanding. Often we’ll see a firm report directly in line with their guidance while shares get punished. Today’s growth hungry investor demands that expectations are always surpassed and this attitude – accompanied by a short-term horizon – means that earnings calls rarely surprise to the upside. When they do, shares usually revert back to the mean over time.
SolarEdge has an earnings call next week which – we can only hope – disappoints the YOLO FOMO investors out there. If you’re someone who is bullish on SolarEdge, you better hope and pray all those supply chain issues the company faced in late 2021 affected revenues and the share price gets absolutely decimated. Despite what Jim Cramer says, there’s nothing better than a quality company with a falling share price. If we decide to pull the trigger on some SolarEdge shares, Nanalyze Premium subscribers will be receiving an email alert.
Lastly, we need to talk about valuation and volatility. You don’t need to understand the concept of beta to see that SolarEdge is a volatile stock that’s appreciated rapidly over the past five years – an increase of +1,470% compared to a Nasdaq return of +115%. When the U.S. sneezes, solar investors catch a cold, and NextEra Energy (NEE) – the biggest renewable energy company in the world – was recently complaining about a decision by U.S. Department of Commerce to initiate an anti-circumvention investigation into the importation of solar panels from select Asian countries which could create problems for NEE’s solar growth plans. Fortunately, SolarEdge has just 40% exposure to the land of the free.
Geopolitical events will inevitably whipsaw the price of SolarEdge stock around like a yoyo, so you’re best served slowly accumulating a position as opposed to trying to time the market. As for valuation, the stock price could easily half or double and still be inline with its solar peers. Below you can see our simple valuation ratio calculated for a handful of solar names in our tech stock catalog.
|Last Quarter Revenue |
|Nanalyze Valuation Ratio|
If solar can realize the growth that’s being predicted, and become the dominant source of energy across the globe, then we’d like to have a dog in that race. Unfortunately, investing in solar hasn’t been as simple as buying an ETF and waiting. SolarEdge seems to be emerging as a global leader in solar infrastructure with plans to diversify into complimentary areas that can provide growth when the solar infrastructure boom subsides. While the stock experiences a great deal of volatility, it seems like a promising way to get global exposure to the growth of solar.
Tech investing is extremely risky. Minimize your risk with our stock research, investment tools, and portfolios, and find out which tech stocks you should avoid. Become a Nanalyze Premium member and find out today!
Good call to NOT invest in Enphase! I lived on Hawaii Island 10 years where I had installed 15 PV panels each with an Enphase micro inverter. One was nonfunctional out of the box and over the course of the next 9 years 7 or 8 more had to be replaced, one of them twice. I was thankful to have the Enphase “Enlighten” monitor so I at least knew which one was out and when but those inverters should have lasted as long as the panels.
Be careful about confusing a product experience with an investment. Yes, easier said than done of course. We haven’t read much about product quality as we need to focus more holistically as we’re not technical experts. Thank you very much for sharing your experience!
Enphase is one of my favourite stocks and it keeps giving ..
Solar in general has been on an upward climb. No idea why the whole niche is so volatile. Regulatory uncertainty?
Good Q3 2022 results. SEDG +10% after hours ($232.98).
Record revenues of $836.7 million.
Record revenues from solar segment of $788.6 million.
It’s almost an expectation that solar companies should be raking in the cash now that the Biden Administration removed those kinks that were stalling development. Thank you for sharing!