Forty-one percent. That's the year-over-year growth clip SolarEdge Technologies (NASDAQ:SEDG) reported in 2017, its last full year of operations.
Forty-two percent. That was the global market share owned in solar inverters at the end of 2017, the last time data was available.
Negative-six percent. That's how shares performed in 2018.
Why? All of last year, Wall Street worried that policy decisions in China, uncertainty in solar markets, and encroaching competition would begin to weigh on the company's eye-popping growth and chip away at its dominance. Those potential headwinds didn't have the doomsday impact that was predicted, and the business actually grew its market share in 2018.
That might have investors wondering what the heck SolarEdge Technologies has to do to impress Wall Street. If year-over-year revenue growth of 67% and operating income growth of 105% weren't enough through the first nine months of 2018, then what could possibly satisfy analysts? Well, there's no guarantee that steady execution against strategic objectives will change Wall Street's bearish tune, but here are three things investors can watch from the business in 2019.
1. Gross profit margin
SolarEdge's SEC filings show that Wall Street analysts weren't entirely misguided to fear encroaching competition in 2018. SolarEdge Technologies disclosed that it managed to grow its market share last year in part by reducing the selling prices of its products. The blended average selling price per watt fell 7.9% in the first nine months of last year compared with the same period of 2017. The trend accelerated as the year went on, with year-over-year selling prices per watt dropping 15.5% in the third quarter of 2018.
It's important to note that the selling price per watt is influenced by other factors, such as selling higher-capacity products to commercial customers that naturally have lower per-watt selling prices than residential products do. Nonetheless, it still had an effect on gross profit margin, which dropped from 34.8% in the third quarter of 2017 to 32.9% in the same period last year.
That's hardly catastrophic, but an avalanche of competition suggests investors will see the trend continue for the foreseeable future. Considering Wall Street didn't appear willing to tolerate any margin erosion last year, that could present a stubborn headwind for the stock price. Investors will want to keep an eye on gross profit margin as an important indicator of how bullish or bearish analysts are likely to be about the company's near-term future.
2. Integration of acquisitions
Another way SolarEdge Technologies is responding to competition in its core markets for solar inverters and power optimizers is through diversification. To accelerate those efforts, the business has made three acquisitions in the past seven months. Investors will want to watch how quickly and smoothly they're integrated, as it might ease Wall Street's concerns within the company's existing product portfolio.
Last May, the company agreed to acquire Gamatronic and jump into the uninterruptible power supply market. It's an area that's expected to rapidly respond to the fast-growing solar market and represents a natural fit with the company's existing portfolio of products that boost the efficiency of solar modules.
Then in October, SolarEdge Technologies announced the acquisition of Kokam. The move will bolster its energy storage lineup and future product engineering capabilities with intellectual property in the area of lithium-ion cells and batteries. Finally, in early 2019, the company acquired SMRE, which provides integrated powertrain technology and electronics for electric vehicles (EVs). The pending deal has nothing to even do with the solar market but rather continues an expansion into the high-reward EV market for SolarEdge.
3. Growth in the EV market
SolarEdge Technologies hasn't been shy about making it known that it wants to become a leader in the EV market. With the number of EVs on the road globally expected to rise from 1 million in 2018 to 20 million in 2030, it's not too difficult to see why that's the case. Although it's still early, investors will want to remain vigilant and see that growth projections are beginning to translate into real-world growth in the year ahead.
When the opportunity materializes, the company will be ready. In addition to the recently announced acquisition of SMRE, the business has recently launched a slew of products created for residential EV applications. That includes its EV-charging single-phase inverter and a standalone EV charging station, which together will allow customers in broad geographies access to at-home charging solutions.
The business has also been busy partnering with other leaders in the space. SolarEdge Technologies and Panasonic recently introduced a new premium smart-module product aimed at the residential market. The system is future-ready to be paired with one of the company's energy storage products or its future EV-charging systems. Similarly, the company recently collaborated with Google to integrate its EV charging products with the Google Assistant. Perhaps that won't really move the needle, but investors can't blame the business for trying.
Can anything change Wall Street's mind?
Continuing to grow revenue and profit -- albeit at the expense of profit margin -- didn't appease Wall Street in 2018. As management looks to diversify from its core solar hardware offerings into adjacent businesses with healthy growth potential, analysts may be forced to reconsider their outlook for SolarEdge Technologies if the company executes. Right now, it certainly appears to be on the right track, but investors learned last year that might not be enough. Whether or not the company is rewarded with a higher share price in 2019, this is a solid business for investors with a long-term mind-set.
Check out the latest SolarEdge Technologies earnings call transcript.