Why did earnings fail to warm SolarEdge’s share price?

SolarEdge’s [SEDG] share price began the year at $319.12, up 235.6% over the previous 12 months.

This article was originally published on OptoInvest in the Next Big Idea.

The stock had been boosted by demand for its solar inverter, power optimiser and energy storage solutions from residential, commercial and small-scale utilities as they increasingly switched to renewable energy. Solar power generation climbed 26% year-over-year in the US in 2020, according to TradingPlatforms.

However, SolarEdge’s share price has fared less well so far in 2021. It slumped 22% to $246.71 on 8 March, before rising 20.5% by 15 March. However by 20 April it had fallen 17.9% again to $243.87. As of 5 May, it had fallen a further 10.1%, seeing it rest 31.3% down so far in 2021.

In the shade

SolarEdge’s share price has suffered due to faltering demand from households and businesses during the coronavirus pandemic. This is despite continued positive momentum for the broader solar industry, which was supported by the green energy aspirations included in US president Joe Biden’s $2.25trn infrastructure plan.

There are concerns that higher interest rates could further hinder customer demand for rooftop solar panels and bigger solar farm projects because of higher borrowing costs.

In March, SolarEdge’s share price was also hit by changes made by California utilities such as Pacific Gas & Electric [PCG] to their solar programmes. This means higher connection charges and lower rebates for households that put up solar panels.

SolarEdge’s fourth quarter and full year 2020 financial results, released on 3 May, also affected investor appetite. The company reported revenues of $358.1m, down 14% from the same period the previous year. Gross profit came in at $110m, down 23.1% from $143m.

SolarEdge also revealed revenues of $406m, down 6% on the first quarter of 2020, but 13% higher than revenues seen during the fourth quarter of 2020.  The company’s net income of $30.1m was up 70% on the previous quarter, but down by 29% on the same period last year.

During the earnings call, SolarEdge warned that its margins would be hit by higher freight costs for key components.

SolarEdge’s share price tumbled 16% from $260.06 at close on 3 May to $218.57 by the end of the following day.

Despite the results, the group expects revenues of between $445m and $465m in the second quarter of 2021, as commercial and residential solar installations begin their post-pandemic recovery.

Zvi Lando, chief executive of SolarEdge, highlighted how the company has also begun delivering powertrain kits for the emoblity sector in Europe, as part of its growth strategy outside of solar.

The company previously bought South Korean lithium-ion battery cell and energy storage group Kokam in 2018 and in February the firm was selected to supply full electrical powertrain units and batteries to Fiat’s e-Ducato light commercial vehicle.

A rising sun

SolarEdge’s exposure to the electric vehicle (EV) market is well-timed. According to IHS Markit, global EV sales are expected to achieve a compounded annual growth rate of 52% to 2025, topping 12.2 million in total.

To date, the core solar inverter market is also tipped to grow by 15.45% over the same period, according to Market Research Future.

Analysts are confident about the long term, according to MarketScreener, with 18 offering an average consensus outperform rating on SolarEdge. Its average target price is $318.88, which would represent a 45% rise from SolarEdge’s share price at close on 5 May.

B. Riley dropped its price target to $368 from $371 after the first-quarter results but retained a buy rating. Barclays, which says SolarEdge is its top pick in the solar sector, primarily driven by its Kokam subsidiary, has an overweight rating and a $365 price target.

However, doubters remain. Writing in The Motley FoolRich Smith suggested that SolarEdge’s “current valuation of 100 times earnings makes it look extremely pricy even taking that [revenues] growth as a given.” This, he said, “makes it a hard one to buy” .

However, investment management firm Richie Capital says SolarEdge will benefit from Biden’s investment in EVs and energy storage, as well as his aim of slashing greenhouse gas emissions by around 50% by 2030.

In its first-quarter investor letter, Richie Capital stated: “We expect interest rates to be somewhat of a headwind for years to come. However, the stronger underlying trends are in their favour. We expect [SolarEdge] to be a net winner from the Biden plan.

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