SolarEdge: Spectacular Numbers
It’s hard to believe from the dark clouds hovering over SolarEdge Technology’s stock price, but the company’s future has never looked brighter.
The company (NSDQ: SEDG) reported earnings of 44c on Feb. 3, 22% better than estimates. Guidance was above estimates for the March quarter. Estimates have been increased to $1.68 for 2016 up from $1.40 one month ago. A trend in increasing future estimates is typically the best barometer for an up stock. By all accounts, every metric we track on this company was spectacular.
The stock hit almost $31 post quarter but has dampened down to $27 alongside the market rout. SolarEdge now trades at a bargain 12 times 2017 earnings versus growth of 39%.
Although investors might be worried about regulatory changes in solar subsidies, SolarEdge has been introducing less costly equipment that helps installers maintain their profits despite lower pricing for solar energy. Most people rightly assume that lower prices equals lower profits. Yet SolarEdge’s specialty is developing technology under a reduced cost structure which allows them to generate higher profits despite lower prices.
The company’s HDWave Inverter, the product whose introduction initially got us so excited about the stock, is one of the products developed to combat pricing declines. This product shipped in small volume in the December quarter but will ramp quickly in March and should represent close to 100% of inverter sales by September. Profitability, which has already improved fabulously, will get an additional jolt from this shift.
Prices for solar inverters, the brains that manage the energy produced by solar panels, have been declining for some time and will continue to do so as competitors join the fray. Luckily for investors, management has built its business with the expectation of continued 7% to 10% price declines.
Investors have had two big concerns about SolarEdge’s business this quarter: First, the worry that sales to SolarCity, which had been its largest customer, would drop dramatically due to the company’s embargo in Nevada where rebate rates for solar energy were cut.
And second, that growth of the domestic residential solar market is slowing more rapidly than expected, partly due to fears over lower rebate rates for surplus energy.
These issues were addressed on the conference call following the release of the quarterly data.
First, will weakness in Nevada by SolarEdge’s largest customer kill the company and how reliant is it on trends in solar rebates?
SolarCity, widely believed to be SolarEdge’s largest customer, has dropped as a percentage of revenue from 25% in fiscal 2015 (year ending June 2015) to roughly 12% in the December quarter. SolarCity recently halted sales in Nevada due to a reduction in solar rebates in that state. Fears that SolarEdge’s sales would suffer as one of its largest customer pulled back in Nevada have hung heavy over the stock.
But on the call, management noted specifically that increases in demand due to positive developments from the solar tax credit extension and steady rebate rates in California have overwhelmed any slack due to a slowdown in Nevada.
The surprise setback in Nevada has left investors worrying that other states will follow suit. A recent ruling in California to keep rebate rates intact lessens that risk. And while it is unlikely that other states will reduce rebates soon, SolarEdge is planning for the worst. It recently introduced its StorEdge battery product that allows customers to store and use their excess solar power instead of selling it back to the utility grid. This helps them become less dependent on the solar grid and the rebates rates from utilities.
Demand for StorEdge has been strong and several utilities are conducting field trials at 100 to 200 sites. Utility adoption of this product would generate huge demand for this product.
Secondly, is the domestic residential market slowing and how exposed is SolarEdge if there is?
Most of the gloom surrounding solar revolves around fears that regulators will crimp residential solar installation growth. While the company still sees healthy 30% to 40% growth in the domestic residential market, it is quietly becoming more exposed to the commercial market which generates higher profits. More powerful inverters, designed for commercial use, were just introduced this quarter and will increase as a portion of revenue.
Estimates now stand at $1.68 for the June 2016 year and $2.34 for June 2017. We feel better than ever that the sun will shine for SolarEdge.