One of the surprise winners in the solar industry right now is a company most customers never see. SolarEdge Technologies (SEDG -3.93%) began as a solar optimizer manufacturer and now makes inverters, monitoring, and other products to serve the residential and commercial solar markets. The company has a market cap of $1.1 billion, which is bigger than most of the world's largest solar module manufacturers and project developers.
What SolarEdge has been able to do is leverage its position as a key supplier to installers and offer them capabilities they can't perform themselves. A mom-and-pop residential installer isn't making any of the components it installs, but components like solar modules, racking, and wiring are often commodities in today's market, making them cheap and readily available. Power optimizers and inverters end up being the monitoring system, or the brains behind the solar system, something small installers need and few commodity partners offer. So, SolarEdge becomes a natural partner who can extract more value than other parts of the value chain. The question now is: Will SolarEdge Technologies's power position last?
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Will SolarEdge edge its way into EVs and storage?
SolarEdge's success is predicated on making both a necessary component and something that can't easily be replaced. Once an installer starts using one monitoring system, it's likely going to continue using the same platform in the future. This can be a valuable position in today's market and in the future. Naturally, SolarEdge's next push is into EVs and energy storage, products that will rely on "brains" to create value for customers.
SolarEdge is now offering an inverter with an EV charger, integrating two key components in the connected home. In areas where energy storage isn't yet economical (most of the country), this will be a great option for the overlap of customers who have solar and an EV.
On top of the EV solution, SolarEdge has started to offer a StorEdge solution that integrates with LG battery packs. If it can become a preferred supplier for solar plus storage homes in the future, it could create tremendous value integrating solar, EVs, and energy storage. But the path isn't easy.
Can SolarEdge overcome inverter company's sketchy past?
SolarEdge isn't the first company to be a hot solar stock selling components in the residential solar industry. Power-One was once the dominant inverter company until the industry switched from string inverters to micro-inverters or power optimizers at the panel. Soon thereafter, Enphase Energy was once the hottest micro-inverter company in the world, but it is now in dire straits as losses have grown in the last two years. A major reason for the company's demise was the growth of SolarEdge's power optimizers, which replaced micro-inverters for many installers.
Therein lies the challenge for SolarEdge. It doesn't make a product that's irreplaceable. If a better component comes along, it will be swapped out quickly, just like Power-One and Enphase Energy were. Another -- potentially more likely -- risk is that it will be designed out as Tesla (TSLA -3.55%) has done with its Powerwall and integrated inverter and as SunPower (SPWR -2.17%) is doing with its Equinox system that integrates micro-inverters and energy storage. If more solar manufacturers decide to integrate inverters and storage into their module sales, it could take a bite out of SolarEdge's business. The bottom line is that the company is in a precarious position, despite its position of strength today.
What components are most valuable in solar?
The core question facing investors in solar is: Which solar component is most important? We know that customers are starting to be more picky about what solar components go on their roofs, but do customers seek out brand names in solar modules or inverters?
Data from EnergySage suggests that some buyers are looking for the highest-quality or best technology, but most customers are just looking for the best value in their solar installation. If that trend continues, SolarEdge will maintain its position as a critical supplier to residential solar installers. But it shouldn't be seen as a given that customers or installers won't trend toward integrated solar, inverter, and energy storage offerings. At the end of the day, do investors really think the power optimizer or inverter -- a product most customers have probably never heard of -- is really the most valuable in solar energy? SolarEdge hopes so.
