Inventory Destocking to Weigh on SolarEdge's Results During 2024

Equity Analyst

Brett Castelli

Inverters Shipped (Gigawatts)

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Gross Margin

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Other

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

SolarEdge is one of the largest global solar inverter manufacturers, based on revenue. The inverter is often referred to as the brains of a solar system, with its purpose being to convert direct current produced by solar panels into alternating current used by households/grid and optimize energy production. 

Broadly, there are three kinds of inverters serving the solar market: string inverters, inverters with power optimizers, and microinverters. SolarEdge is the pioneer of the inverter with power optimizer solution. 

SolarEdge began commercial shipments in 2010 and has grown into the world’s leading inverter manufacturer, based on revenue. The company’s DC optimizer is prevalent in rooftop applications, as it provides functionality not found in a string inverter, but at a lower price than microinverters. SolarEdge initially targeted the residential market but has expanded its product suite to the commercial market and more recently the utility-scale market. This strategy has expanded the company's total addressable market, or TAM, but average selling prices and gross margins typically deteriorate as project sizes increase. 

In recent years, SolarEdge has also expanded beyond inverters to other areas, including energy storage and utility-scale solar markets. While these new markets offer the potential to meaningfully increase its TAM, they also carry elevated execution risk. The move into energy storage makes sense from a product perspective, but is a departure from its past philosophy of outsourcing manufacturing. 

SolarEdge has proved itself as a market share leader capable of achieving consistent profitability in the distributed solar inverter market. Similarly, we expect the company's storage efforts to be successful given the close link between inverters and storage. However, we take a wait-and-see approach with the company's entrance into the utility-scale solar market.

Business Strategy & Outlook

We assign a no-moat rating to SolarEdge, as we don’t have enough confidence that its current excess profits will last beyond 10 years, the threshold to justify a narrow-moat rating. 

Many components of the photovoltaic solar value chain have been commoditized as the industry has matured. Solar module firms, for example, are notorious for failing to achieve returns equal to or above their cost of capital. Inverters are a similar story, but the market is bifurcated between rooftop and utility-scale applications. Utility-scale inverters have been commoditized as project developers compete on largely one thing: price. To date, we have seen residential inverter suppliers (particularly in the United States) show the ability to earn excess profits. Our concern is regarding the duration of this profitability.

We do not believe SolarEdge has a moat based on its intellectual property. While SolarEdge devotes 8%-10% of its sales to research and development, we don’t believe this has led to a large enough gap between it and its competitors. For example, competitors such as SMA Solar and Huawei have released products that are very close substitutes to SolarEdge’s. In addition, the company typically unveils a new product generation every two to three years, which we do not view as prohibitively long. Further, many features can typically be replicated by competitors in relatively short order.

SolarEdge’s solar inverter business is well diversified by end market and geography, which limits its exposure to the highly profitable U.S. residential segment (about 33% of 2020 segment sales) compared with peer Enphase (80% of 2020 sales). The U.S. residential market is subject to stringent safety regulations not found in other markets. This has contributed to what is largely a duopoly (Enphase and SolarEdge have a combined 90% market share) and high levels of profitability. In addition, U.S.-China tensions have made it difficult for Chinese competitors to enter the U.S. market (Huawei in 2019, for example). While this has contributed to a unique market structure in the U.S., we do not have enough confidence that this will continue to be the case. 

SolarEdge’s primary competitive advantage is its brand with installers. Having shipped its first product in 2010, the company has a long track record in the industry and its brand is synonymous with the DC optimizer solution. We think installers consider SolarEdge products to be high quality and reasonably priced. Thus, we think installers would need to see significant savings in order to switch from a trusted brand, such as SolarEdge. We doubt this can be achieved while maintaining reliability and investments in R&D.

We do not think switching costs contribute to SolarEdge’s moat at this time. Installer-inverter supplier relationships are not exclusive, and the lack of time-intensive training for a specific brand makes it relatively easy for installers to switch. We see the potential for switching costs to increase as SolarEdge moves from a supplier of DC optimizers to a supplier of complete distributed energy solutions (inverter and optimizers, energy storage, and software monitoring), but SolarEdge is behind industry peers in this transition, and we await further data points before attributing this as a moat source.

SolarEdge’s strategy to manufacture its own battery cells and packs for its energy storage business is not likely to result in a cost advantage, in our view. We think the enormous amount of battery capacity being built globally over the coming years will eliminate any short-term benefit this strategy provides.

None

Economic Moat

SolarEdge Technologies

SolarEdge Technologies, Inc. engages in the development of energy technology, which provides inverter solutions. The firm operates through the following segments: Solar and All Other. The Solar segment includes the design, development, manufacturing, and sales of an inverter solution designed to maximize power generation. The All Other segment includes the design, development, manufacturing and sales of UPS products, energy storage products, e-Mobility products, and automated machines. Its products and services include photovoltaic inverters, power optimizers, photovoltaic monitoring, software tools, and electric vehicle chargers. The company was founded by Guy Sella, Lior Handelsman, Yoav Galin, Meir Adest, and Amir Fishelov in 2006 and is headquartered in Herzliya, Israel.

Earnings data Q1 2024

SolarEdge addresses market challenges, anticipates revenue normalization in 2-3 quarters

SolarEdge faced challenges in Q3 due to market demand slowdown and cancellations in the European market. However, the company is taking operational adjustments to address these challenges and anticipates revenue normalization in the next few quarters. Despite the challenges, SolarEdge sees opportunities for increased cash flow from operations and growth in revenues impacting cash flow in the coming quarters.

SolarEdge reports Q4 revenue of $316 million, eyes U.S. commercial growth

SolarEdge faces challenges in market dynamics and inventory management but remains optimistic about future growth prospects, especially in the U.S. commercial sector and European markets. The company is focused on cost reduction measures and expects to reach a strong revenue run rate in the second half of the year.