As the solar industry has developed over the past two decades, various companies have tried to make their particular niche the high-value position in the supply chain. Solar panel manufacturers attempted to differentiate their wares by delivering higher efficiency, installers tried to create well-known brands that could command a premium, and component suppliers pushed to squeeze themselves into larger segments of the market.
One company that seems to have found a particularly valuable spot in the industry is SolarEdge Technologies (SEDG -2.03%), maker of power optimizers and inverters for residential solar systems. Though it supplies only a small number of components, it's worth more than companies like SunPower (SPWR -4.24%), Canadian Solar (CSIQ -2.36%), or Sunrun (RUN -1.09%).
At the heart of the supply chain
SolarEdge sits in the middle of the solar industry in a lot of ways. Its products are embedded between the solar panels that produce electricity and the home where it's consumed, and also between the panels and the wider power grid. It doesn't have direct contact with end customers or utilities, and certainly isn't financing solar projects. Instead, it's a business-to-business supplier.
The purpose of its power optimizers and inverters is to maximize the energy production from solar panels, and then send that electricity to the home or grid in a usable (alternating current) form. In effect, this means that SolarEdge's products are the "brains" of residential solar power systems.
They tie all of the home's energy points together, and its products can be installed by any installer on any grid in any home. That's has allowed it to gain a scale spanning multiple sections of the value chain, and draw a higher market share.
Show me the money
What really separates SolarEdge from its competitors is its ability to command high margins for its products. Most solar suppliers struggle to get their gross margins into the teens, but SolarEdge consistently operates with a gross margin above 30%.
The company has also shown steady growth on both the top and bottom lines. In an unusual dynamic, it has expanded its market both geographically and by introducing new products, and not been hit with competition from low-cost manufacturers.
Ways SolarEdge can expand
As successful as SolarEdge has been thus far, it still has obvious ways to expand its product line. The company is a natural supplier of components for the energy storage systems that are starting to be installed more commonly in conjunction with solar panels, allowing the energy they generate to be used in the home when it's needed, or distributed out onto the grid when it's most valuable. And its power optimizers can be paired with its inverters in products like its StorEdge system.
There are dozens of companies trying to increase their footprints in the energy storage business, but SolarEdge is a natural fit. If it plays its cards right, energy storage could be a huge growth driver for the company over the long term.
Is SolarEdge's run going to continue?
I've been skeptical that SolarEdge could avoid a huge push by competitors in the market for years, but if it hasn't happened by now, it might not at all. Certainly, recent tensions between the U.S. and China have played a role in keeping would-be competitors in the Chinese inverter market away from this side of the Pacific.
SolarEdge holds a powerful position as a supplier with the ability to sell to any residential or commercial installer globally while commanding a high margin. Until we see cracks in its armor, I think this will continue to be a top renewable energy stock.