SolarEdge Stock Continues to Shine in Dark Tech Times
By all indications, we should be living in the golden age of green technology. Both the United States and Europe have introduced sweet subsidies to large swaths of their respective clean energy economies. While some may argue that these are just protectionist policies in disguise that will actually dampen the market, companies and consumers are lining up to take advantage of all sorts of tax breaks and rebates. Yet we’ve struggled mightily to fill our Nanalyze Disruptive Tech Portfolio with quality green technology companies.
The problem is that some of these companies spend more time churning out ESG reports that are longer than Tolstoy’s War and Peace, rather than making money. Some sectors are simply a non-starter for us. Hydrogen? Forget about it. Any pure-play electric vehicle company not named Tesla (TSLA) is probably a waste of time. In fact, we’ve spent more time recently moving companies out of our portfolio. NextEra Energy (NEE) is really a value stock that belongs in a diversified dividend growth investing strategy, while Beyond Meat (BYND) left a bad taste in our mouth for plant-based meat.
Why we Invested in Solar with SolarEdge Stock
One bright spot has been solar. A year ago, we sifted through the biggest solar stocks in the world as part of a methodical march toward picking a pure-play solar company. Eventually, SolarEdge (SEDG) edged out its chief competitor, Enphase (ENPH), as a less-risky bet on the less-sexy side of solar hardware. Rather than manufacture the photovoltaics, both companies offer their own solar inverter components and designs that make it possible to convert the power of the sun into usable energy. We liked SolarEdge stock over Enphase because it checked more boxes of what we are looking for in a good solar stock:
- Not based in China, due to risks both foreign and domestic.
- International diversification. A true market leader is going to be global. Also, less regulatory risk due to country-specific rules, regulations, and changing subsidies. This is a big differentiator between SolarEdge and Enphase. About 80% of the latter’s revenue relies on the United States versus 36% for SolarEdge, based on latest Q4-2022 results.
- Ideally, market diversification across residential, commercial, and utility-scale.
- Holistic solutions. As we’ll talk about shortly, SolarEdge is offering a suite of smart energy solutions built around its inverter technology. And batteries are becoming a big part of that turnkey business.
Now that we’ve had that little recap, let’s look at what progress SolarEdge stock has made in the last year.
What’s New with SolarEdge Stock
At the end of the day, it’s a numbers game, so let’s begin there. SolarEdge closed 2022 with $3.1 billion in revenue, which represents 58% growth from the previous year. Counting “just” the $2.8 billion in revenue related solely to its solar business, SolarEdge grew revenues by 63%.
Looking a little deeper behind the scenes, we see that revenue from Europe was a big driver, increasing nearly 90% from a year ago. The company mainly attributes the gain as spoils of war (our words, not theirs), thanks to the energy price increases caused by the Ukraine-Russia conflict. This necessary shift to renewables like solar may continue to pay dividends for some time, though it would probably be unreasonable to expect revenue coming out of Europe will remain supercharged for the long term.
An additional boost to the company’s bottom line is coming from its recently introduced battery storage solutions for residential, commercial, and utility that are being manufactured at its new South Korea-based facility. In Q4-2022, more than half of the batteries used in new PV installations with SolarEdge inverter systems included the company’s own battery cells.
In fact, the company has launched what it calls SolarEdge Home for its residential market. This offering is a complete energy management system for the home, including PVs, battery backup, EV charging, load control, SolarEdge smart energy devices, and, of course, an app to manage them all in one single place. The company is also offering a similar version for commercial-scale projects and is developing a utility-scale product as well.
In addition, SolarEdge acquired Hark Systems earlier this year. Hark is an energy analytics and industrial IoT startup out of the U.K. with a software as a service (SaaS) product that SolarEdge is rolling out to selected customers later this year. The platform integrates with solar storage, EV charging services, HVAC, factory machinery, building management systems, lighting systems, smart meters, and other industrial assets. It’s basically a digital twin for energy management. SolarEdge sees the technology playing a big role in its future commercial offerings.
Non-solar is a Non-Starter for Revenue Growth
Not everything was rainbows and butterflies for SolarEdge in 2022. Its non-solar business only grew by about 7% year over year. Presumably, the modest gain came from its growing battery and energy storage business, though the financials lacked much granularity to tell us whether that’s indeed the case. That’s our hunch based on the fact that the company’s other non-solar segments, e-mobility and automation machines, are not performing as expected.
These business units came into the fold through the 2019 acquisition of SMRE, a publicly traded Italian company that specialized in developing end-to-end e-mobility solutions for electric and hybrid drivetrains used in motorcycles, commercial vehicles, and trucks. While e-mobility revenues continued “at a steady rate” thanks to a contract to supply multinational automaker Stellantis with powertrain units, SolarEdge wrote off $107.5 million in goodwill, which represented the entire intangible assets related to the SMRE acquisition.
The company wrote off an additional $7 million related to its automation machines division, which specializes in the design and construction of automation solutions for industrial cutting, welding, and stitching machinery. While the e-mobility solution kind of has some feng shui for a solar company, the value of the automation machines division seems debatable and a potential distraction for executing on the core business. As shareholders in SolarEdge stock, we say dump it.
What Will SolarEdge Stock Do in 2023?
If we knew the answer to that question, we probably wouldn’t need to sell so much blood plasma to buy weed every other week. However, we can talk about what SolarEdge has on the immediate horizon.
The company expects Q1-2023 revenues of between $915 million to $945 million. That means annualized revenues would fall between $3.7 billion and $3.8 billion. Based on a market cap just north of $17 billion, that gives us a simple valuation ratio of just 4.5. Anything higher than 20 is considered overpriced, so adding shares of SolarEdge stock is tempting given the continued revenue growth predictions of 20% to 30% per year. From Zvi Lando, SolarEdge CEO:
I can give you an indicator, which is true for the company as a whole, but it’s most pronounced in Europe, that our current backlog for 2023 is well above what we delivered in 2022 globally and, in particular, in Europe. So, as far as we can see, the market … demand is good, and the market is strong, and we are ramping production to meet that demand.Zvi Lando, SolarEdge CEO
Part of the plan to meet that demand is ramping up manufacturing of inverters and optimizers in the United States through a combination of contract manufacturing and SolarEdge-owned facilities. This move will allow the company to take advantage of the fat subsidies offered through the U.S. Inflation Reduction Act (IRA) at full tilt by the second half of 2024.
While the IRA has solar companies singing kumbaya, they could hit a few sour notes along the way. Specifically, who is going to do all the work? Vice reported about the migrant farmworker aspect of building solar farms, so finding and paying a qualified workforce to support this rapidly growing industry represents a real potential bottleneck.
However, SolarEdge seems to be taking a proactive approach by designing and engineering its products and systems to be installed as quickly and easily as possible. For example, software helps guide the physical installation and commissioning of an entire system like the SolarEdge Home network. The goal is to streamline the process so that a crew can knock it out in less than a day and be ready for the night shift at the solar-powered Amazon warehouse next door.
That’s the sort of forward-thinking strategy you expect to get from a market leader. SolarEdge is growing revenues, expanding its portfolio into turnkey solutions, and penetrating more deeply into markets where it makes sense (for the most part). It’s a shining light in dark tech times like these.
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The main question is: which stock will perform better from this point on: SEDG or ENPH (after recent ENPH drop) ?
Both stocks had comparable performance for the last year (Enphase performed much better but it gave up all its 1Y gains with the recent 25% drop). On the longer timeframe (5Y) ENPH was +2,762%, while SEDG was +411%.
Which stock will have appreciated the most ten years from now? Unfortunately, we have a portfolio constituent limitation that requires us to choose one solar stock. For those that don’t, maybe just hold both and don’t try to pick a winner.