SolarEdge: Recovery Amid Supply Chain Challenges and Fierce Competition (NASDAQ:SEDG)

Introduction

SolarEdge Technologies (NASDAQ:SEDG) designs, manufactures and sells inverter systems to enable the generation of solar-optimized photovoltaic installations. Its technologies have diversified products such as power optimizers, inverters and cloud-based monitoring systems. The company initially targeted the residential marketsbut began commercial needs.

While the world’s rapid demand for electricity is expected to grow to 160 exajoules by 2040, the company has faced growing threats of supply chain disruption and fierce competition since 2023, leading to poor performance of his stock.

However, with SolarEdge’s firm commitment to accelerate the transition to a low-carbon world powered by a distributed and decentralized energy grid, as its CEO reiterates, the company has realized its vision and recorded a good quarter in Q2 2024 along with government support. . Therefore, we rate SolarEdge as a Strong buy.

SEDG thrives in the midst of supply chain disruption in the following ways

Government support

China is presenting a major solar disruption to the US, where SolarEdge operates. China will install more solar panels than the US in 2023. China currently operates 80% of the world’s solar panel market share, which is a major caveat for SolarEdge.

The US government has introduced subsidies that favor US companies for the production of affordable solar panels. SolarEdge and its competitors have a competitive advantage over Chinese solar panels from the subsidy policy. The US has also introduced tariffs to protect local manufacturers from affordable imports from China.

This decision favored SolarEdge, as reported in Q2 2024. The company started to post positive earnings even with reduced shipments due to a favorable environment.

SolarEdge is well positioned to benefit from the US Federal Reserve’s intention to cut interest rates, leading to affordable borrowing costs.

SolarEdge posted an operating income loss from Q4-2023 – $237.M to Q2-2024 – $160.2M. Access to low-interest loans will allow SolarEdge to scale up its operations. The solar sector is poised to benefit from lower interest rates as a falling inflation rate will boost consumer spending. Consumers are expected to have disposable income to invest in solar panel installations.

Sustained market demand

Currently, only 4% of US energy production comes from solar panels. The forecast for solar generation growth is tremendous as more businesses and people push for clean energy.

The demand for photovoltaic (PV) energy is increasing globally. According to SolarEdge, in Q2-2024 the company is actively positioning itself for this demand, recognizing the growth of electrification and independent energy demands. Decarbonisation commitments also increase PV as most industries are driven by ESG standards. The company will also benefit from other US government decarbonization initiatives.

Since these policies were implemented, solar energy partners, including SolarEdge, have begun to recover from projected increased demand for solar energy. Further exponential growth of solar power compared to other alternatives is expected as renewables begin to dominate electricity.

SolarEdge, in its latest Q2-2024, reported an increase in monitored systems to 4 million, 128.2 million power optimizers shipped, 54.5 GW capacity systems and 5.7 million inverters shipped. With US power generation expected to be led by wind and solar in the forecast for the next two years, SolarEdge is poised to benefit from a 75% increase in solar demand. By 2025, there will be an increase in solar energy production from 163 billion KWh in 2023 to 286 KWh in 2025.

Growing customer base

There is solid demand for solar energy as energy prices rise, which will also lead to growth in other sources of electricity, including solar power generation. Remember that the existing 4% solar generation in the US will experience a tremendous score, carrying the opportunities available for solar expansion. This creates a better chance of preparing a purchase amid the impending transition to clean energy.

US government intervention has significantly improved the efficiency of solar energy. Solar panel technology has become more affordable. The subsidy policy will greatly improve the efficiency of solar panel production and improve the demand of commercial customers.

A survey shows that 90% of SolarEdge inverter users recommend the company’s products after a high energy conversion of 5-25% compared to traditional inverters. SolarEdge inverters can convert a quarter of sunlight, making it an attractive option for businesses and homeowners.

Recovery amid fierce competition

Some of SolarEdge’s competitors include Allegro MicroSystems ( ALGM ) and Enphase ( ENPH ). Let’s see how SolarEdge stacks up with Enphase. Within Inverters, the two companies have leverage in producing efficient inverters for home and business use. SolarEdge and Enphase are close competitors in inverter manufacturing sharing a 95% market share. Enphase has 48% and SolarEdge 40% of the world’s inverter market share.

Click to enlarge

Recent new optimizers have influenced the growth of shipments in Q1-2024 as they have become affordable and offer better energy harvesting capabilities. SolarEdge’s integrated options offer consumption monitoring, vehicle charging and more, giving it an edge over Enphase.

With a competitive edge over its competitors, SolarEdge Q3-2024 forecasts solar segment revenue growth from $245 million to $280 million. The IRA Production Tax Credit counts as a basis for earning a positive gross margin between 0% and 4%. The company may report revenue between $260 million and $290 million.

Analysis and evaluation of earnings

Although the company is still troubled by disruptive obstacles such as supply chain and competition, it still announced record positive results in Q2 2024, which shows its solid business model and profitability. Revenue rose to $265.2 million in Q2 2024 from $204.2 million in Q1. Non-GAAP net profit margin fell from Q1 2024 -6.5% to a positive 0.2% this quarter. This shows that the company is recovering from a negative earnings position, which can improve the stock’s performance

In terms of valuation, PS’s ratio is slightly less than 1x, while its closest competitors such as Enphase and Allegro Microsystems are around 11x and 5x, respectively, even the sales performance of the company is not weaker than that of its peers. This is mainly attributed to the loss that SolarEdge is experiencing in the last two quarters, from which the company is recovering as discussed.

Therefore, we forecast the SolarEdge PS ratio to grow back over the next few quarters given macro and company-specific factors. One of the major reasons is that the solar sector will face an increase in customers as clean energy policies begin to take shape. For example, the reduction in interest rates on US government subsidies is designed to improve disposable income and the affordability of solar panels. Inevitably, customers are about to demand more inverters as predicted. As such, we project the PS ratio to grow slightly closer to its peers to around 1.7x – 2.5x this year.

With consensus revenue of around $1.1 billion this financial year, this will indicate a target price range of around $31 – $45, representing an upside of over 20%. We therefore rate it a Strong Buy.

Investment risks

• Government inaction: The US Federal Reserve may fail to cut interest rates. Anticipated credit financing and disposable income would cushion the decline in sales and revenue.
• Growing Competition: Microinverters from companies like Enphase pose a significant threat to SolarEdge inverters. The two close competitors are fiercely competing for market share in power optimizers, with Enphase in the lead.
• Changing market: Solar energy, although a reliable and economical source of renewable energy, has its problems of intermittency and lower utilization rate. Therefore, other types of renewable energy, such as wind and hydropower, may come first in the future.