Based in Herzliya, Israel, SolarEdge Technologies, Inc. (SEDG) is a designer and seller of direct current optimized inverter systems for solar photovoltaic (PV) installations internationally. The stock’s price has climbed  68.4% over the past year thanks to an increase in demand for residential and commercial solar installers. However, the stock is currently trading 30.9% below its 52-week high of $377. Also, SEDG’s stock has slumped 19% year-to-date and nearly 8% over the past three months.

Although the company has been expanding its offerings by entering strategic partnerships and delivering powertrain kits for the e-mobility sector in Europe, it has failed to grow its revenues and profitability.

Moreover, for the second quarter of 2021, SEDG expects its  non-GAAP gross margin to be within a  32% – 34% range. This represents a decline from a 36.5% non-GAAP gross margin in its last reported quarter. So, while SEDG’s peers are benefitting nicely from solar industry tailwinds, SEDG is still struggling to stay afloat.

Here is what we think could influence SEDG’ performance in the near-term:

Competitive Landscape

President Biden’s planned infrastructure investment, which, among other elements, would mandate the use of renewable energy and promote the country’s shift from fossil fuels, has given a boost to the solar industry. This favorable backdrop has led dominant players in the sector, such as  Enphase Energy, Inc. (ENPH), SunPower Corporation (SPWR), and First Solar, Inc. (FSLR) to significantly increase their solar technology production to grab market share. In fact, ENPH’s rapid growth in the microinverter-based solar technology market could be a threat to SEDG.

SEDG’s total residential shipments declined 10.1% year-over-year in the first quarter of 2021, while its  commercial shipment declined 6.7% from the same period last year. While its peers are ramping up production and solar installations, SEDG’s residential and commercial shipment of solar products are declining.

Disappointing Financials

During the first quarter, ended March 31, 2021, SEDG’s revenue declined 6% year-over-year to $405.49 million. The company’s revenue related to the sale of solar products declined 8% from their year-ago value to $376.4 million. Its non-GAAP operating income came in at $71.9 million, representing a 9% decline from the prior-year quarter to $71.9 million. Furthermore, SEDG’s non-GAAP EPS was $0.98, flat year-over-year. The company reported  $24.1 million in operating cash flow, down from $107.7 million in the first quarter of 2020.

Also, its 32.2% trailing-12-month gross profit margin is 34.2% lower than the 49% industry average. And its 8.7% CAPEX/Sales ratio is 270.3% higher than the 2.3% industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, SEDG’s 53.94x is 135.6% higher than the 26.52x industry average. In terms of trailing-12-month EV/EBITDA ratio, the stock’s 84.82 is 324.4% higher than the 19.99 industry average. And its 96.71x trailing-12-month Price/Cash  is significantly higher than the 22.17x industry average.

Unfavorable POWR Ratings

SEDG has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. SEDG has a Stability Grade of D. This indicates that the stock is more volatile than its peers.

In terms of Value Grade, the company has a D, which is in sync with its stretched valuation. It also has a D grade for Growth, which is consistent with the stock’s inadequate financials.

Click here to see the additional POWR Ratings for SEDG (Quality, Sentiment, and Momentum).

The stock is ranked #15 of 21 stocks in the F-rated Solar industry. For more top-ranked stocks in this industry, click here.

Bottom Line

Although the  solar industry’s favorable backdrop has been a boon for the solar companies, SEDG has not capitalized on the industry tailwinds. While its peers are expanding their businesses and generating substantial revenues, SEDG’s revenues continue to decline. In addition to that, its high valuation is not  justified by its growth prospects. So, we think it could be wise to avoid the stock now.

SEDG shares rose $2.56 (+0.98%) in premarket trading Wednesday. Year-to-date, SEDG has declined -18.39%, versus a 13.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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