SolarEdge (NASDAQ:SEDG) has been one of the more frustrating holdings in my portfolio, but unfortunately it isn’t clear if that suffering is ending anytime soon. The company has seen revenues fall off a cliff, with both unit-level and bottom-line margins getting crushed in tandem. It doesn’t help that its closest competitor is showing far greater resiliency from a profitability perspective. My initial investment thesis appears to be breaking apart, as this cyclical downturn has posed great questions about the quality of the business model and growth story. That said, the stock is exceedingly cheap and in theory should offer significant exposure to a recovery in solar growth. Management has also taken a curious strategy of prioritizing share repurchases amidst such a difficult period. I am downgrading the stock from “strong buy” to “buy” to reflect the growing risks and admit that my prior bullishness was misplaced.
SEDG Stock Price
Cheap stocks can always get cheaper. That statement is especially true when secular growth disappears and profits turn negative.
I last covered SEDG in January where I rated the stock a strong buy on account of the low valuation. The stock has since fallen 30% since then, but my bullishness has declined since then as I have been disappointed by the recent financial developments.
SEDG Stock Key Metrics
In its most recent quarter, revenues plunged 65% YoY to $315.8 million, coming in at the low end of guidance for $300 million to $350 million.
SEDG saw units shipped plunge especially in its inverter segment.
Gross margin was negative 17.9% or 3.3% on a non-GAAP basis, coming below guidance for 5% to 8% non-GAAP gross margins.
The company burned $107.8 million in non-GAAP operating income, coming below guidance for $106 million in operating losses.
SEDG ended the quarter with $1.3 billion and $635 million in net cash, down from $831 million in the third quarter. Meanwhile, inventories grew sequentially to $1.4 billion. Business is clearly not operating as usual.
Looking ahead, management has guided for the first quarter to see another difficult showing, with revenues expected to plunge 77% YoY to $215 million at the high end. Non-GAAP gross margins are expected to compress further to between negative 3% and positive 1%. The company is expected to post around a $130 million non-GAAP operating loss.
On the conference call, management predicted that “European residential installations will bottom in the first quarter and improve thereafter,” similar to commentary given by Enphase (ENPH). However, ENPH stock is up since reporting earnings whereas SEDG is down - what explains the discrepancy? During the solar bull market, both ENPH and SEDG showed stunning top and bottom-line growth. Investors may have been willing to overlook the lower profit margins at SEDG due to the company still being solidly profitable in its own right. But the company just posted a quarter with slim unit-level margins and deeply negative operating margins. ENPH, on the other hand, maintained a near 50% gross margin and generated GAAP net income in the latest quarter. It is not a good sign when your closest competitor is posting significantly better financial results under the same operating conditions. While one could make an argument that SEDG has greater geographic concentration in Europe, it is clear that the main drivers of the discrepancy are more related to better business execution and the structural advantages of the ENPH microinverter technology.
SEDG management noted that they do not expect the US market to improve until interest rates decline - by now it is clear that the company is highly dependent on interest rates (this rhetoric from management was not so apparent just several quarters ago).
SEDG is now guiding for “underlying business run rate” instead of actual revenues due to the extreme supply-demand imbalance. Management expects the second half of the year to reach an underlying business run rate of $600 million to $650 million, indicating steep sequential acceleration. Management aims to undership in each quarter in order to rightsize the inventory imbalance, with the goal to reduce the amount of undershipment in each successive quarter. Management expects non-GAAP operating expenses to “stabilize” in the upcoming quarter and expects the new operating expense run-rate to total between $112 million and $117 million per quarter. The potential for long term cost discipline is one silver lining amidst the brutal solar bear market.
I found it interesting that in spite of the downturn in the solar market, management continued to state expectations that the company may “generate a substantial amount of cash” in 2024. Management stated that starting after the second quarter, they expect to generate cash from winding down inventory. Management then took it a step further by outlining expectations to “start executing our $300 million stock repurchase program in the first quarter of 2024.” This capital allocation decision might take some investors by surprise (or at least I was surprised) given that you’d expect companies to instead prioritize preserving cash during difficult periods, but management assured analysts that they had a “measured way to make sure that we are matching the pace of our purchasing of stock to the pace of our cash generation.” Management stated that they do not believe that they “will need to raise capital” and that “buying stock or shares is the right solution.” Time will tell if this decision proves reckless or opportunistic.
Is SEDG Stock A Buy, Sell, or Hold?
SEDG is one of the “picks and shovels” companies helping to enable the transition towards renewable energy. Electricity demand is projected to grow rapidly, increasing the demand for renewable generation including solar.
SEDG offers products and solutions for the entire home though I suspect most readers may find electric vehicle charging to be the most relatable use case.
The solar industry is facing real headwinds. First, the higher interest rate environment has reduced homeowner’s appetite to invest in new power generation systems, due to both a slowdown in home sales as well as higher cost to finance these projects. But solar companies are also facing stiff competition from Chinese competitors which are able to undercut on price. The solar industry had seen furious growth heading into the pandemic, but it is unclear if that growth story is on pause or permanently impaired.
I’d argue that SEDG stock is pricing in these risks. The stock trades at just 14x 2025 estimates, as analysts expect the company to come out of 2024 with a more healthy macro environment and leaner cost structure.
Consensus estimates call for the company to recover some of the revenue losses in 2025 with revenue growth hovering in the high single-digit range thereafter.
I previously assumed a recovery to 10% top-line growth and 15% long term net margins. These assumptions now look overly optimistic. I now assume 8% top-line growth and 10% long term net margins. Assuming a 15x long term earnings multiple, that places fair value at around 1.5x sales, implying some upside over the coming years as the business recovers, but significantly less optimistic than my prior views. The issue is that whereas I had previously viewed SEDG to be a strong growth stock facing temporary roadblocks, I now am questioning the business model quality given the vastly different pace of recovery relative to ENPH. This is a good moment to note that selling options may offer an intriguing alternative. The January 2026 $35 strike put options sell for around $7 each, offering around 10% annual return potential. Barring a sudden return of Wall Street love for the name, it may make more sense to seek capped return upside at lower risk rather than swinging for a home run.
What are the key risks? It is possible that ENPH (and other competitors) take market share amidst this difficult environment, as SEDG is not in a great financial position to compete effectively. Prior to 2022, I would have stated that SEDG and ENPH operated in a solid duopoly but now that is not so clear. ENPH has long had some technological superiority due to more reliable systems (at least based on my cursory look at consumer reviews) but it is worrying to see the company outperform so much in the current environment in spite of charging premium prices. This is an environment in which I would have expected consumers to care more about pricing, thus for ENPH to outperform even in this environment is implying that there may be some business model risk for SEDG.
I am downgrading SEDG from “strong buy” to “buy” to reflect the high risk profile and my tempered expectations for future upside.
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