SolarEdge Technologies‘ (NASDAQ: SEDG) The share price plummeted after posting its third quarter results last week. Not only did the company’s revenue decline 18% year over year, but management gave a poor outlook for the fourth quarter. The big question is: do these results reflect a deterioration in the company’s longer-term prospects, or was the sell-off due to a profit posting in a stock that is still up 144% year-to-date?
COVID-19 generates sales
SolarEdge’s decline in sales in the third quarter was in stark contrast to its historical pattern: the inverter and optimizer manufacturer has achieved average growth of 45% per year since it was listed in 2015. However, last quarter sales were hit by a slower-than-expected recovery in commercial installations. The installation of new solar power systems, especially in the commercial sector, has stalled due to the COVID-19 pandemic.
Management anticipates that commercial installations will recover significantly in 2021 and that the new line of lower-cost optimizers will increase sales.
By comparison, household product sales were relatively stable in the third quarter. Sales in this segment increased sequentially by 2% in accordance with management’s instructions.
SolarEdge expects commercial sales to remain weak in the fourth quarter. Overall, the company expects sales to decline by 15% compared to the previous year, which would, however, also amount to a sequential growth of 5%. Gross margins are projected to be in the 32% to 34% range depending on where they landed in the third quarter.
It’s worth noting that SolarEdge’s decline in sales was not due to a loss of market share. On the conference call on third quarter results, CEO Zvi Lando claimed the company is now doing broadly better in terms of market share than it was a year ago. Management is confident that SolarEdge will maintain or improve its stake in 2021.
In addition to inverters and optimizers, energy storage products could be an important long-term growth driver for SolarEdge. The company announced a delay of several months in releasing its household battery. The batteries are expected to add to the company’s revenue from the second quarter of 2021. That news could have been one of the factors that contributed to the stock’s decline after the company reported results.
The postponement of the battery start was due to pandemic-related travel restrictions. However, revenue from the product was expected to be minimal in 2020, and a delay of a few months shouldn’t be a major problem.
Another important growth avenue for SolarEdge in the long run could be the electric vehicle market. The drive train units for light commercial vehicles, light commercial vehicles and e-motorcycles are currently in the test and qualification phase.
SolarEdge appears well positioned to grow given the positive outlook for solar energy as well as the company’s leading position in the photovoltaic inverters and optimizers segment. However, it faces increasing competition from other vendors, which can hurt the company’s margins.
At the same time, changes in government policies and subsidies can have a significant impact on the demand for SolarEdge products. It must consistently deliver innovative offerings at competitive prices in order to maintain and expand its market share.
A great growth stock?
Given the risks SolarEdge faces, investors can’t expect it to return to the high levels of sales and earnings growth it had before 2020. Because of that, with a P / E ratio of around 69, the stock looks a bit expensive, even after its recent decline.
Nevertheless, SolarEdge offers promising growth prospects. The performance in the third quarter does not reflect any significant change in long-term development. Even without a Democratic majority in the Senate, President-elect Joe Biden’s arrival in the Oval Office should be optimistic for solar stocks. The decline in the price of SolarEdge stock provides an entry point for long-term investors. Given the company’s weak fourth quarter outlook, the stock could remain volatile in the short term, which could provide additional attractive entry points. Buying the dips could be a great way to build a position in this stock.