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...

Solar inverter maker SolarEdge (NASDAQ:SEDG) cut through analyst earnings targets like a hot Ginsu through butter last night, beating estimates by a good 20%. This morning, it's earning its reward in the form of a slew of analyst upgrades and price target hikes.

At last report, analysts had announced no fewer than three separate price target hikes for SolarEdge this morning, plus a combo upgrade-and-price-target-hike from B. Riley FBR. Here's what you need to know.

The sun

SolarEdge stock looks blazing hot this morning. But will it soon flame out? Image source: Getty Images.

What SolarEdge said

In keeping with the latest fad on Wall Street, SolarEdge reported its Q3 earnings yesterday in two flavors: GAAP and "adjusted" (the kind of numbers we used to deride as pro forma, but that Wall Street has fallen back in love with).

SolarEdge's adjusted profit for the quarter was $0.66 per share, a whopping 20% above Wall Street's predicted $0.55. But SolarEdge's more conservative GAAP number was nearly as good: $0.61 per share -- also above estimates. That GAAP number was also 74% better than last year's Q3 profit of $0.35 per share.

Sales for the quarter likewise exceeded expectations, coming in at $166.6 million -- up 30% year over year -- versus an expected $158.4 million. Free cash flowed freely, with SolarEdge reporting $77.7 million in cash profits accumulated year to date -- 20% ahead of reported net income and up 77% in comparison to where SolarEdge was at the end of Q3 last year.

Commenting on the results, SolarEdge CEO Guy Sella patted himself on the back for turning in "another record quarter, in revenues, profitability and cash flow generation." He also pointed out that SolarEdge, an Israeli company, is now getting 51% of its revenue from outside the U.S. (As recently as last year, SolarEdge sourced nearly 67% of its revenue from U.S. customers, according to data from S&P Global Market Intelligence.)

What Wall Street had to say about all that

Cue cheering on Wall Street. At last count, TheFly had tabulated price target raises from analysts at Canaccord Genuity (which sees SolarEdge's $32-ish stock going to $40 within a year), Roth Capital and Needham & Co. (both pricing SolarEdge at $42), and JPMorgan ($43). Most enthusiastic of all was B. Riley FBR, which hiked its neutral rating on SolarEdge stock up to buy and assigned SolarEdge the highest price target of all -- $45 a share, or a potential 38.5% profit for investors who bought SolarEdge at its $32.50 closing price yesterday.

Here's a quick sampling of what they had to say (with thanks to our friends at both TheFly.com and StreetInsider.com for the commentary):

  • SolarEdge "continues to deliver revenue and margin upsides with the added benefit of free cash flow." (Canaccord)
  • "[S]everal cost initiatives will drive operating margin expansion in 2018." (Needham)
  • Forward estimates also look "strong." (Roth)
  • SolarEdge has delivered "another beat and raise." (JPMorgan)
  • "[P]enetration of the utility-scale segment could drive the next layer of growth for" SolarEdge. (Riley FBR)

How should investors react?

And time will tell if these predictions are correct. But how does SolarEdge stock look today, and is it still cheap enough to buy after this morning's sharp run-up in share price? (SolarEdge stock opened at $35.85 per share, up more than 10% from its closing price Wednesday).

Here's how I look at it (and bear in mind -- I own SolarEdge stock).

With a market capitalization of $1.5 billion, $230 million cash in the bank, and no debt to speak of, SolarEdge sells for an ex-cash valuation (i.e., an enterprise value) of roughly $1.3 billion. Weighed against that are the company's $61.7 million in trailing net income, and $109.9 million in trailing free cash flow.

Result: Valued on GAAP earnings, SolarEdge sells for a multiple of 21. Valued on free cash flow, its EV/FCF is 11.8. At last report, S&P Global projections showed SolarEdge as likely to continue growing earnings at a 24% annualized rate over the next five years. SolarEdge pays no dividend, but valued on growth alone, both its cash-adjusted P/E and its EV/FCF tend to suggest the stock remains undervalued -- even after this morning's run-up.

Count me with Wall Street on this one: I think SolarEdge stock is still a buy.

Rich Smith owns shares of SolarEdge Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.