SolarEdge Technologies, Inc. (SEDG +1.00%) remains one of the few solar suppliers in the U.S. to remain profitable as the industry goes through its current rough patch. Fiscal second quarter results released Tuesday came in slightly ahead of the market's expectations, and rising margins were a good sign for operations.
But SolarEdge remains in a tough position in the solar industry long-term. It provides a critical component for rooftop solar systems, but is rarely seen as the most valuable component in the stack. A customer may see the value of a more efficient solar panel or want a better looking design, but the invisible optimizer or inverter is often an afterthought and that may lead to a tougher future than investors would like.
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The numbers
Revenue for the fiscal second quarter was $111.5 million, gross margin was 35%, and net income came in at $9.8 million, or $0.22 per share. Revenue was down 13% sequentially and 11% year over year as sale prices dropped and volumes declined, while earnings per share fell from $0.35 a year ago.
Even as revenues fall, management is putting more focus on R&D and sales and marketing, hoping to expand the product line and grow sales that way. There's been a long-term trend of moving from optimizers to inverters and now to energy storage solutions like StorEdge.
The challenge is that SolarEdge is growing into already crowded markets and has no way to grow its business without a pull from an end customer. A homeowner doesn't usually demand SolarEdge equipment; instead, an installer chooses the company's products. But competitors like Tesla and SunPower are starting to design out companies like SolarEdge as they produce their own power electronics. And it will become even more common for large companies to design intermediate components as energy storage becomes more common.
Who can offer a full solution for solar installers?
The question investors have to ask is: What supplier will be the one to aggregate multiple components to create a simple offering for solar installers? Will it be easier for SunPower or Tesla or Samsung design their own optimizers, micro inverters, string inverters, or monitoring systems than it will be for SolarEdge to begin making solar panels or selling systems directly to customers?
I think it's easy to see that SolarEdge is in a fairly weak competitive position because it doesn't own the customer or the most valuable piece of the solar system, the solar panel. Instead, it's stuck in the middle, forced to compete with a growing number of players in an increasingly competitive market.
This will only get worse as energy storage enters the mix. It will be key for solar companies to have a relationship with both customers and utilities to control energy storage and provide value to customers. I don't see how SolarEdge makes that transition easily, so while it has good technology and is making a profitable product I think it should focus on what it does best and not try to expand into markets it can't effectively compete in today.
