SEDG: SolarEdge Technologies vs. SunRun: Which Stock is a Better Buy?

The changing face of industrialization globally has brought clean energy stocks under limelight. With a Biden win, domestic companies such as SolarEdge Technologies, Inc. (SEDG) and Sunrun, Inc. (RUN) are expected to lead the clean energy transition in the United States. Both the companies have been taking steps to capitalize on the changing trend in the country, through strategic mergers and acquisitions, and/or raising funds to finance business operations.

With the former Vice President’s pledge to install 500 million solar panels across the country over the next five years, both SEDG and RUN are gearing up for expected high volume of orders from the federal government. Private residential and commercial orders are likely to rise in the future as well, as people and businesses have started taking the climate issue seriously.

Both companies generated significant returns over the past five years. SEDG gained 1,339.9% over this period, while RUN returned 884.3%. However, in terms of year-to-date performance, RUN is the clear winner with a 380.4% gain versus SEDG’s 182.9% return.

But which stock is a better buy now? Let’s find out.

Latest Developments

SEDG raised $550 million through a senior note offering in September, which is expected to fund its business operations and expansion plans. The company launched a new energy hub inverter with prism technology in June, which can charge smart energy devices up to 200A.

RUN, on the other hand, expanded its business operations by acquiring Vivint Solar. RUN expects cost synergies of at least $90 million over the next one and a half years through this acquisition, which increased its enterprise value to $22 billion.

On November 5^th, RUN announced general availability of rechargeable solar battery system Brightbox to eight additional states in the US, thereby extending its market reach to 19 states across the country. The company also signed a virtual power plant agreement with South California Edison to enhance the regional grid resilience at lower operating expenses.

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Recent Financial Results

SEDG’s revenues rose 2% sequentially to $338.10 million in the third quarter that ended September 2020. This can be attributed to a slight increase in solar business revenues to $312.50 million. Non-GAAP gross margin increased 110 basis points sequentially to 33.5%, while non-GAAP operating income improved 7% from the prior quarter to $50 million. Non-GAAP EPS grew 24.7% sequentially to $1.21.

RUN deployed 109 megawatts in the third quarter that ended September 2020, up 40% sequentially. Revenue from the customer incentives and agreements segment rose 19% year-over-year to $114.50 million, while gross earnings assets increased 18% from the year-ago value to $4 billion. EPS rose 20% from the same period last year to $0.30.

Past and Expected Financial Performance

SEDG’s revenue and total assets increased at CAGRs of 42.1%and 60.7%, respectively, over the past three years. RUN’s revenue and total assets, on the other hand, grew at CAGRs 19.1% and 19.3%, respectively, over the same period. SEDG’s EPS increased 55.8% year-over-year, while RUN’s EPS rose 6.4% year-over-year.

SEDG’s EPS is expected to increase 14.3% next year, and at a rate of 20% per annum over the next five years. Revenue is expected to rise 2.2% in the current year, and 19.3% next year.

Analysts expect RUN’s EPS to rise 416.7% next year, and at a rate of 20.5% per annum over the next five year. Consensus revenue estimates indicate a 5.4% improvement in the current year, and 54.8% rise next year.

Profitability

SEDG’s trailing 12-month revenue is 1.8 times what RUN generates. SEDG is also more profitable with a gross margin of 32.5% compared to RUN’s 22.9%.

SEDG’s ROE and ROA of 19.8% and 6.8%, respectively, compare favorably with RUN’s negative values.

Thus, SEDG is the more profitable stock here.

Valuation

In terms of forward P/E, RUN is currently trading at 843.91x, 89% more expensive than SEDG, which is currently trading at 92.78x. RUN is also more expensive in terms trailing 12-month PEG (148.47x versus 1.44x) and Price/Sales (9.48x versus 8.78x).

However, SEDG’s trailing 12-month Price-to-Book ratio of 13.35x is 38.7% more expensive than RUN’s 8.19x.

POWR Ratings

Both SEDG and RUN are rated “Neutral” in our proprietary POWR Ratings system. Here’s how the four components of the POWR Ratings are graded for each of these stocks:

RUN has a “C” for Trade Grade, Buy & Hold Grade, and Peer Grade. It is currently ranked #10 out of 19 stocks in the Solar industry.

SEDG has a “B” for Trade Grade, a “C” for Buy & Hold Grade and Industry Rank, and a “D” for Peer Grade. It is currently ranked #9 in the same industry.

The Winner

While the Biden win indicates significant growth potential for both SEDG and RUN, both these companies are still reeling under the economic slump. SEDG’s quarterly revenues declined 17.6% year-over-year, while RUN’s quarterly revenues declined 2.7% year-over-year. Both SEDG and RUN borrowed substantial funds to keep their business operational over the last quarter, as reflected by their debt to equity ratios of 59.63 and 156.58, respectively.

A higher debt and consequent interest burden not only reduce the total shareholder returns, but also increases the risk associated with such stocks. Thus, potential investors should wait for better entry points, as the companies recover from the pandemic slump through fiscal stimulus expected from the next administration.

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SEDG shares were trading at $273.80 per share on Wednesday afternoon, up $4.83 (+1.80%). Year-to-date, SEDG has gained 187.94%, versus a 14.17% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...