SolarEdge Q2 2018: Huawei Looms Large On The Horizon

For Q2 2018, SolarEdge Technologies (SEDG) reported a performance broadly in line with our expectations. Q3 revenue guidance was a bit weak, but nothing by itself concerning.

The stock, however, has plunged some 20% after earnings, coming down to the $45 level that it reached after reporting Q1 results.

In this piece, we explore the most likely reason behind the selloff: the impending competition from Huawei.

We start by reviewing Q2 numbers, comment on the relevance of Huawei entering Western markets with a residential solar solution similar to SolarEdge’s, highlight SolarEdge strengths to counter the threat, update on valuation and close with investor takeaways. Throughout the article, we also touch on all the main topics discussed during the Q2 earnings conference call.

As a reminder: SolarEdge is a core holding of the market-beating IW Portfolio since August 2015. In February 2018, we presented the long thesis to the investment community. For an introduction to this wonderful company and to understand the valuation methodology employed in this article, we recommend you to have a look at the original long-term thesis before moving on.

Quarterly financials

The numbers

Revenues of $227 million were above guidance and up 67% YoY on the back of a soft Q2 last year. Gross margin of 36.1% came in at the lower end of guidance (36 to 38%).

Q3 guidance calls for revenues of $235 million and gross margins within the usual 36 to 38% range. The revenue outlook represents 41% YoY growth (on the back of 30% YoY growth last year) and 3.5% sequentially.

The 3.5% sequential top-line growth guidance for Q3 was the weakest part of the report. It compares negatively to QoQ revenue growth of 8.2% in Q2 and 10.9% in Q1. Still, compounding QoQ growth rates for the first three quarters of the year (Q1, Q2, and guidance for Q3) brings YTD growth to 24%, in line with our expectation for 20%+ annual growth in the coming years.

To filter out quarterly noise, we like to look at financials on a twelve-trailing-month (TTM) basis. Doing that, we see that Q2 TTM revenue was up 61% YoY with 36.7% gross margin. And Q3 guidance calls for 63% YoY TTM revenue growth and 37% gross margin (assuming  Q3 gross margin comes in at 36.5%, below the midpoint of guidance).

Moreover, on a TTM basis, the company increased operating leverage by 50 bps QoQ and 200 bps YoY.

If there are reasons for concern, they do not yet show in the numbers.

The underlying dynamics

But valuation is about future cash flows, so let us have a few words about ongoing market dynamics.

In 2018, SolarEdge is navigating a flattish solar market in North America, which is responsible for about half of the revenues. This was partially offset by company strength in Europe. And the US residential market is expected to get back to growth next year.