Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
For the second time in three trading days, shares of solar-inverter maker SolarEdge Technologies (NASDAQ:SEDG) are winning praise on Wall Street. Last week, it was Needham & Co. doubling down on its existing buy rating on SolarEdge, and adding a new and improved price target of $25 to the stock. This morning, Oppenheimer & Co. followed suit, assigning a $25 price target of its own and upgrading its rating to outperform.
Now here are three more things you need to know.
1. What Needham said last week
TheFly.com has the skinny on Needham's price target hike from Friday. As they relate, Needham analysts met with SolarEdge's CFO recently and came away impressed with the "big opportunities" SolarEdge expects to exploit in commercial and international markets (SolarEdge is based in Herzliya, Israel).
In particular, SolarEdge is expecting to gain more market share in the U.S. residential market for rooftop solar, which has already helped SolarEdge stock to record sales growth of 260% over just the past three years. Needham believes this will translate to about 10% growth in share price over the next year.
2. What Oppenheimer is saying now
Oppenheimer is seconding that emotion today, saying it sees a "relative improvement" in SolarEdge's competitive position. Last year, the big worry surrounding SolarEdge was that one of its big customers like Tesla (NASDAQ: TSLA) or Vivint Solar might halt purchases of solar inverters (used to convert solar-generated electricity into electric current usable by households) from SolarEdge, and begin building this kind of equipment in-house instead. Recent worries over the health of Tesla's solar panel business, however, seem to have eased these concerns.
As my fellow Fool Travis Hoium pointed out earlier this year, Tesla is "shrinking" its SolarCity subsidiary in favor of buying panels from third-party providers. (Travis goes so far as to call the SolarCity business "largely a bust.") If Tesla is going to be buying its panels from others, it's unlikely Tesla will have much interest in sinking money into investments to build its inverters in-house. That's a win for SolarEdge.
3. What else Oppenheimer said
Furthermore, Oppenheimer sees SolarEdge's cost of production declining (after cost of goods sold roughly tripled over the past three years), while on the revenue side, "limited price pressure" permits SolarEdge to charge what it needs to cover its cost of production (revenue is rising even faster than costs).
Result: Oppenheimer predicts "steadily" improving gross margins "for the balance of the year." In that regard, it's worth noting that data from S&P Global Market Intelligence shows that SolarEdge's gross margin -- negative as recently as 2012, turned positive (5.6%) in 2013, and has been rising ever since -- recently hitting 34% over the last 12 month period.
The most important thing: Valuing SolarEdge stock
Oppenheimer is looking for SolarEdge to produce "relatively flat" revenue this year, with steady profit margins, then resume growing revenue in 2018. If this is how things play out, 2017 should yield income roughly in line with what the company earned last year ($51 million), or even a bit more.
That's not bad profit for a company valued at only $908 million in market capitalization, and with $202 million in the bank (without a lick of debt). It works out to a debt-adjusted P/E ratio of about 13.8. Valued on SolarEdge's trailing free cash flow of $90.5 million, the stock looks even cheaper, with an enterprise value-to-free-cash-flow ratio of just 7.8.
At a consensus long-term, analyst-predicted earnings growth rate of 24%, I think that's a steal of a deal. (I should think so -- I own the stock after all.) But the truth is, SolarEdge stock would probably be fairly valued even if it grows only half that fast. Oppenheimer and Needham are right to recommend it.