The valuations of companies in the solar industry have risen sharply this year – and with these higher share prices so too do growth expectations.
High expectations are exactly the reason SolarEdge technology (NASDAQ: SEDG) Stocks were beaten up last month. And when it starts to lose market share, those stocks can continue their downtrend.
What SolarEdge reported in the third quarter
For starters, we should base this discussion on some metrics from the third quarter of 2020. Management announced that SolarEdge revenue for the quarter was down 17.6% to $ 338.1 million as the number of power optimizers shipped decreased 28.7% to 3.3 million and the number of shipped Inverters fell 18.8% to 152,500 units.
Some may be tempted to overlook these declines in supplies and revenue as the home solar industry has had a difficult year. But the deeper we dig, the more we find fundamental problems with SolarEdge’s business.
SolarEdge may lose market share
What worries SolarEdge most is that it may already be losing market share. The following table shows the changes in unit numbers between Q3 2019 and Q3 2020 for SolarEdge and microinverter competitors Enphase (NASDAQ: ENPH)and then used Solar power (NASDAQ: SPWR) and Sunrun (NASDAQ: RUN) as representatives for the industry as a whole, because they are solar installers on the roof. Sales of its power optimizers have declined more than deliveries of Enphase microinverters and have declined significantly more than installations from SunPower and Sunrun. We also know that SolarEdge’s megawatts shipped to residential customers decreased 25.9% in the third quarter of 2020, another indicator of the loss of residential market share.
|Companies||Q3 2019||Q3 2020||change|
|SolarEdge (power optimizer)||4.59 million units||3.27 million units||(28.7%)|
|SolarEdge (inverter)||187,900 units||152,500 units||(18.8%)|
|Enphase||1.80 million units||1.44 million units||(19.7%)|
|Solar power||42 MW||36 MW||(14.3%)|
|Sunrun||107.2 MW||109.5 MW||(2.1%)|
We can look at loss of market share another way by comparing SolarEdge’s earnings to Enphase Energy’s. The sales trends suggest that power optimizers are losing ground to microinverters and this must be a concern of SolarEdge shareholders.
Ebb and flow are natural in any industry, but longtime solar investors know that the industry has seen several fundamental changes over the years. SolarEdge fears it could go in a different direction.
We have seen this film before
The hardware business has always been dangerous for solar companies. Power-One was once the dominant inverter supplier for residential solar systems before it was bought and sold twice and then became practically irrelevant. First solar (NASDAQ: FSLR) The industry once dominated, generating margins in excess of 50% on their solar panels, only to see Chinese manufacturers market them. And even in China, manufacturers like Suntech Power and Yingli Green Energy have collapsed from the top of the industry almost overnight. So we should all be aware that competitive advantages in this industry are fleeting.
If SolarEdge continues to lose market share, its decline could quickly lead to snowballs. And nothing prevents installation partners from moving from Enphase or SunPower to a new platform that offers solutions similar to SolarEdge. Installers large and small choose the hardware and platform partners they work with and are not tied to one partner in the long run, so doing business is not very difficult. When partners decide that a different platform solution is better, they can easily switch, as was the case with Power-One, Suntech and Yingli. Operationally, that’s the risk.
From an investment perspective, there is concern that SolarEdge is an incredibly expensive stock that may have seen its best years of growth.
All of this makes me very concerned about SolarEdge’s stock today. I’m even adding an underperform call on the My CAPS page that keeps track of whether SolarEdge is actually underperforming the market. This solar stock is very bullish, but right now I don’t see enough evidence that the company will live up to those high expectations.