SolarEdge: Blue Skies Ahead

Summary

SolarEdge closed 2017 with another blowout quarter: strong market share gains, stable ASPs, and continuous cost initiatives resulted in record sales, profitability, and cash generation.

During the earnings conference call Q&A session, a detailed outlook was given on future geographic and segment mix. The positive implications on growth are analyzed.

We estimate the value of the assets and of the business earnings power.

We find that SolarEdge is trading at an insufficient premium over Earnings Power Value in light of its first-class return on capital and expectations for significant revenue growth.

SolarEdge Technologies (SEDG) designs, develops, and sells direct current optimized inverter systems for solar photovoltaic (PV) installations worldwide. The company’s systems include power optimizers, inverters, and cloud-based monitoring software and are used in a range of solar market segments, including residential, commercial, and small utility-scale solar installations.

SolarEdge was founded in 2006 in Israel. It revolutionized the way power is harvested in residential solar installations with an intelligent solution that optimizes the DC voltage at the individual PV module level while performing the DC-to-AC conversion in a centralized inverter. This architecture maximizes power generation, even in the presence of shadows or irregular roof geometries, while lowering system costs. It also allows for real-time safety and monitoring capabilities.

Since its foundation, the company has expanded both geographically and across market segments. Longer term, it is aiming squarely at becoming the leading provider of inverter solutions across all solar PV market segments.

The common stock trades in Nasdaq since 2015 and is in our market-beating portfolio since August of that year. We added aggressively to our long position during the sell-off in 2016 and are now sitting on triple-digit returns.

Q4 2017 results and guidance for Q1 2018

For its more recent quarter, the company reported 70% Y/Y revenue growth and 129% Y/Y operating income growth, thanks to a 250 bp gross margin expansion and operating leverage.

For Q1 2018, SolarEdge is guiding to revenues of $205 million (implying 78% Y/Y growth) and flat gross margins of 37% at the midpoint.

It should be noted, however, that those comps are against Q4 2016 and Q1 2017, which were unusually weak due to the effects of the last-minute extension of the Solar Investment Tax Credit Extension on US demand for solar PV systems. On a TTM basis, Q4 2017 revenue increased 24% Y/Y, and Q1 2018 guidance calls for 45% growth.