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Ishan Majumdar
Ishan Majumdar
Articles (62) 

SolarEdge: Has The Multi-Bagger Story Ended?

This renewable energy player has seen its growth flatten due to the trade war

December 09, 2019 | About:

The returns provided by some stocks are just too good to be true. Imagine one’s capital multiplying sixfold in three years. SolarEdge Technologies (NASDAQ:SEDG) is one company that has given such returns to investors. The fact that the company operates in the highly promising, fast-growing renewable energy space and has a functioning line of products that are widely accepted across the industry is perhaps the reason for its phenomenal growth. However, the important question today is whether the SolarEdge stock is still worth buying, or if it has become too pricey for investors.

What does SolarEdge do?

SolarEdge is an Israel-based company that produces and distributes inverter systems, power optimizers and solutions related to solar power. Its products work well with all forms of solar panels and have strong applications in the residential and commercial sectors. Established in 2006, the company turned profitable in 2015 and has been a market leader in the U.S. and one of the top-performing growth stocks ever since. As per the most recent result, SolarEdge has shipped more than 45.4 million optimizers and 1.9 million inverters since the commencement of the shipment of products in January 2010.

The manufacturing process of the company is completely outside Israel and the U.S. The company has manufacturing lines in China and Vietnam and they are adding more and more lines to cater to rising demand. The manufacturing of the power optimizers takes place in Hungary. The heavy dependence of SolarEdge on its Chinese manufacturing facilities is one of the biggest reasons why its margins were hit during the trade war.

Results marred by high tariffs

SolarEdge delivered yet another mixed result for the quarter ended Sept. 30, 2019, in which the company failed to meet analyst expectations on earnings front for the fourth time in a row. The management reported a top-line of $410.56 million, which was well above the analyst consensus estimate of $402.89 million. This was largely driven by the 4.6 million power optimizers and 188,000 inverters shipped during the quarter. However, the company’s earnings per share of 81 cents were much below the expected analyst number of $1. The biggest reason for this number is the U.S. trade war against China.

U.S. tariffs on products made in China nicreased from 10% to 25% in June. The company raided prices to make customers absorb the increased cost, but that was not enough. CEO Guy Sella had to undertake cost-cutting initiatives and push for greater economies of scale, but despite all these factors, SolarEdge’s margins were 150 basis points below those in the previous quarter.

Stock is too expensive

SolarEdge is a classic example of a stock that has grown purely because of investor optimism and the promising nature of its sector. The three-year revenue growth of SolarEdge is actually negative, but despite this, the stock has grown 513% in this period, giving fantastic returns to investors.

As one can observe in the above chart, the stock’s growth has flattened over the past few months, which means that the multi-bagger story is coming to an end. The profitability and value creation of SolarEdge has never been a question as it has an operating margin of 13.51% resulting in a return on equity as high as 17.51%. However, the problem lies in how much the stock price has appreciated. SolarEdge’s stock is trading at a price-earnings ratio of 39.39 and an enterprise value-revenue multiple of 3.01. This current price level is 3.67 times the Graham number and 4.17 times the Peter Lynch fair value. It justifies the recent flattening of the stock price and indicates that the only way for the value to increase now is through stronger revenues and better margins.

Key takeaways

There is little doubt that SolarEdge’s current price level is definitely not a buying level. The promising returns so far may be too tempting for current investors to let go, and there is no obvious reason to exit the stock if you already own a poslition. One important fact to remember is that SolarEdge faces strong competition from Chinese players like Huawei, so its premium is far from justified as it is not in any kind of monopolistic position. As the stock moved on with its upward journey, various gurus like George Soros (Trades, Portfolio) and Hotchkis & Wiley gradually exited their positions and booked good profits. There has also been a lot of insider selling in the past couple of quarters. All these factors point towards the fact that investors must be highly cautious while holding on to this stock.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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