The COVID-19 pandemic is going to make it difficult to gauge just how well companies in the solar industry are doing. Installations are going to be lower than they would have been otherwise, especially in the residential industry, where face-to-face sales have often been the key to closing sales.
When SolarEdge Technologies (NASDAQ:SEDG) reported earnings on Monday, it gave investors a little bit of hope that the industry may actually grow in 2020. And business outside of the U.S. business may actually be booming because COVID-19 is more contained in key markets like Europe and Asia.
Second-quarter 2020 revenue was $331.9 million and net income was $36.7 million, both up from $325.0 million and $32.9 million, respectively, a year ago. Management said that North American revenue was flat at $124 million, but European revenue increased by $22 million to $144 million.
Revenue was down 23% from the first quarter, but that shouldn't be a shock to investors. The solar industry has been affected by COVID-19 and companies in the U.S. and Europe were slowed dramatically in the second quarter. It's hard to gauge whether stagnant revenue is a sign of strength in a market that will bounce back in the coming years, or a sign that growth is starting to slow overall. Only time will tell.
It's also worth noting that gross margin is weakening slightly, which could be a concern long-term (which I'll get to below). Non-GAAP gross margin for the quarter was down from 35.7% a year ago to 32.4% as average sale prices fell 8% per watt. That's partly due to a shift to more commercial solar products and would have been worse if it wasn't for a stronger euro versus the dollar.
Customers are getting stronger
It's worth watching sales growth and margins because SolarEdge's stock is valued as if it'll grow rapidly over the next decade. Shares currently trade for 62 times earnings and 6.7 times sales, according to YCharts.
But future growth may be driven by lower-margin commercial markets. And even residential customers may be looking for lower costs, which could hurt SolarEdge's margins.
The recent announcement that Sunrun (NASDAQ:RUN) will buy Vivint Solar (NYSE:VSLR) I think is driven by a desire to reach a scale that will allow them to negotiate lower hardware costs from suppliers, like SolarEdge. And even a small reduction in sale prices can hit gross margin and ultimately the bottom line quickly.
The solar market isn't stagnant
I'm reading between the lines a little, but I don't see the second quarter of 2020 as being nearly as strong as the market does. SolarEdge may have beaten estimates, but margins are falling and competitors are building strategies that could squeeze margins long-term.
For those who have invested in renewable energy stocks for a long time, you know that the market can shift rapidly and business strategies are always changing. SolarEdge dominated value creation as module-level power electronics were mandated around the world, but now some of its customers are getting bigger and more powerful at a time when competing products like microinverters and energy storage are picking up steam. That makes this a risky stock given the valuation and slow growth. SolarEdge may still beat the market in the future, but I don't think it's a safe bet for investors right now.