SolarEdge Technologies (NASDAQ:SEDG) has been the hottest stock in solar over the past year: It has risen 273%, and shows no signs of stopping. It has become a go-to supplier of residential solar power optimizers and inverters, and has used its dominance in the U.S. market as a jumping-off point to expand its global reach. 

Given SolarEdge's success, it's worth considering whether the stock's value can keep climbing, or if it has gone too far too fast. The answer may not be as clear as it seems. 

Home with rooftop solar installed.

Image source: Getty Images.

Why SolarEdge's stock is up

As the charts below show, SolarEdge Technologies has been growing both revenue and net income quickly since the beginning of 2017. In the past year, revenue rose 39.2% to $701.9 million, and net income rose 51.9% to $105.7 million. Also note that most of the stock's gains were driven by a rising P/E ratio, not earnings growth. 

SEDG Revenue (TTM) Chart

SEDG Revenue (TTM) data by YCharts

From an operational perspective, SolarEdge is riding several growth waves that have combined to make it one of the fastest growing companies in solar. 

One has been its rapid expansion in the inverter business. In the first quarter of 2018, the company shipped over 2.5 million power optimizers, -- its original product -- and 100,000 inverters, enough to build 800 megawatts (MW) of solar projects. To illustrate how quickly SolarEdge has grown its footprint in inverters, it held just 1.7% of the U.S. residential inverter market in 2012, but by the end of 2017, it had the biggest share at 42.5%. 

Its second key growth driver has been in international markets, where its efforts to win business are still in relatively early stages. The share of its sales made in foreign markets has increased from 33% in Q4 2016 to 43% in Q1 2018,and more growth is expected as it gains traction in its current markets like Europe, and launches new products in Japan and Australia. 

Third, SolarEdge has benefited as small, regional players have increased their share of the solar installation market: Their piece of the pie grew from 21% to 27% between 2015 and the first half of 2017, at the expense of Vivint Solar, Sunrun, and Tesla, which are the top three for market share. In addition, SolarEdge supplies components to Sunrun, which has grown its share of the market from 14% to 27% over the same time frame. 

Regional installers are a critical customer bloc for SolarEdge because the large installers have developed their own monitoring platforms and apps -- the parts of a solar power system that customers interact with. Small installers don't have the resources to do that, so when they use SolarEdge's inverters, they generally also rely on its monitoring platform to be the hub for their solar power systems. 

Risks to SolarEdge's business

As well as business is going for SolarEdge today, the company does face challenges ahead. Chinese competitors are introducing new optimizers into the market; those could put pressure on prices and take some market share. Its gross margin is a lofty 37.9%, so it's not surprising that competitors see solar optimizers and inverters as a market they'd like to enter. So far, management says they're not too worried about Chinese competition, particularly given the more stringent requirements for those products in the U.S. and European markets, but investors should keep an eye on SolarEdge's margins to see what impacts those new entries have on how aggressive it can be with pricing. 

What I would fear even more is the integration of inverters or power optimizers at a different part of the value chain. For example, SunPower's residential solar product comes with micro-inverters pre-installed on each solar panel, eliminating the need for power optimizers or traditional inverters. Tesla's solution has been to build an inverter into its Powerwall energy storage system, which reduces the number of energy components installed in a home. 

As solar panel manufacturers get larger and more powerful, it wouldn't be surprising to see them develop and install their own power optimizers and micro-inverters, reducing the overall demand for SolarEdge's products. 

Is SolarEdge stock a buy? 

There's no question SolarEdge has performed well the last few years, riding both industry trends and improvements in its own product lines. What makes me hesitant to buy the stock is its P/E ratio of near 30, and the competition -- both direct and indirect -- coming to its part of the residential solar market. I think SolarEdge is reaching its peak level of growth right now. Market share gains will be harder to come by in the future. 

The risk of slowing growth and falling margins over the next few years will keep me out of SolarEdge's stock given the premium shares are trading at today. But I'm also not crazy enough to short this company. So I'll watch from the sidelines and wait for a better entry point to appear before I invest in this residential solar company. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.