The stock of solar installers Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR) have been hammered in the past three months as it looks more and more likely that some sort of tariff or price floor will be put on imported solar panels. These companies have ridden the wave of falling solar panel prices for years, so any increase in prices would be a detriment to their business.
At the same time, SolarEdge Technologies (NASDAQ:SEDG) has faced no such pressure on its stock. In fact, the stock is trading near a 52-week high. What investors should know is that SolarEdge faces a lot of the same challenges as solar installers if tariffs are introduced.
What happens to the solar market under solar tariffs
There would be two impacts on the residential solar market if tariffs are introduced. One is that there would be pressure on the cost of every component installers use. Solar panels may have a set price, so inverters, power optimizers, racking, and wiring would all be put under pressure. This is where SolarEdge's business lies, and the company would be pushed to lower costs so installers could stay afloat.
A related pressure would be on the addressable market installers can pursue. The reason over a million residential solar systems have been installed in the U.S. is because they're cost-effective for customers. Any reduction in costs and the price charged to customers expands the addressable solar market, and any increase in costs reduces the size of the market. Tariffs would undoubtedly shrink the residential solar market because of the cost it would add.
Neither a smaller market or price pressure would be good for SolarEdge. The market seems to be pricing these pressures in for Sunrun and Vivint Solar, but not yet for SolarEdge's stock.
International sales are growing but the U.S. is still No. 1
SolarEdge has made a concerted effort to grow its business internationally, but the U.S. was still 54% of sales as of the second quarter of 2017. That's down from 57% a year earlier, but if the U.S. market craters, it could have a massive impact on the company's operations.
International sales are also a little more difficult to establish than in the U.S. Here, Vivint, Sunrun, and Tesla's (NASDAQ: TSLA) SolarCity accounted for over 50% of the market until last year, so selling to any of those players was enough to give a supplier like SolarEdge's business a jolt of growth. Internationally, there's no such concentration, so sales growth is more tedious.
Don't assume SolarEdge's market is safe
If the U.S. residential solar market falters under tariffs there will be a fallout for a company like SolarEdge. The company could see sales shrink and margins shrink just based on U.S. market pressure. The market is already pricing in some of that downside with solar installers, and this is one supplier that will be affected in a big way as well.