After nearly tripling in value in 2020, shares of solar inverter manufacturer SolarEdge Technologies (SEDG 7.04%) were hammered after it announced earnings last week. However, the company actually met its guidance for the third quarter, and its gross margins actually improved. Did the market overreact? Or is there more than meets the eye to this story?
SolarEdge scorecard for Q3 2020
During its second-quarter 2020 earnings call, the company set the following expectations for the quarter ahead:
Metric |
Target |
Q3 2020 result |
---|---|---|
Total revenue |
$325 million to $350 million |
$338.10 million |
Solar revenue |
$305 million to $325 million |
$312.50 million |
Gross margin |
33% to 35% |
33.5% |
Additionally, during the Q2 earnings call, the company said it would begin shipping its residential battery product in the second half of 2020. This is important to SolarEdge's ability to grow its revenue base, and the company has been investing in its "non-solar" business -- which includes its batteries -- for a couple of years now.
So, let's take a look to see how the company performed against its own expectations for the quarter and what expectations it is setting going forward.
1. Revenue
SolarEdge hit the mid-point of its overall revenue target for the quarter. The company gets its revenue from its solar and non-solar businesses, with over 90% of its revenue and nearly all the growth coming from its solar products at this time. Looking at its solar business, the company's worldwide revenue grew by 1% sequentially only, and was down 19% from the year-ago quarter. This was as expected, because of COVID-19, and baked into its overall revenue target.
However, its U.S. solar business was down a whopping 46% from the same quarter a year ago. The company attributed the drop to a slower-than-expected recovery in sales of its commercial products. Some marketing research firms have been predicting a drop of 25% in rooftop solar in 2020 as a result of the pandemic, so 46% does seem out of line with expectations, and raises the question of whether the company is losing market share. However, it is possible to get a 46% decline via a drop in the sale of commercial products without ceding a ton of ground in residential, where its main competitor is most active at this time.
Also noteworthy was the company's revenue outlook for the fourth quarter of 2020. It set a target of about 5% growth from Q3 2020 on the high end. The solar industry is very seasonal, with Q4 usually bringing slower growth, and the company's target compares favorably to the 2% it achieved from Q3 2019 to Q4 2019. The potential problem, however, comes when one compares this growth rate to its main U.S. competitor Enphase Energy's (ENPH 1.80%) projection for Q4 2020. Enphase projected revenue growth of over 40% -- yes, 40% -- on the high end.
While the companies' product lines and geographic distribution are different, an eight times' difference in quarterly revenue growth does catch one's eye and raises the flag of market share erosion again. On the other hand, Enphase has a smaller base in Europe and international markets that can grow faster, as well as a new product -- so it doesn't necessarily mean that its higher growth is coming at the expense of SolarEdge's.
2. Gross margins
The company delivered on the low end of its guidance for the quarter, and set a target of 34% to 36% in gross margins for Q4 2020. The higher margin expectations come as the U.S. and residential products will be a larger component of the mix as the U.S. economy continues to recover.
Margins for SolarEdge's non-solar business grew by 25% from the previous quarter, reaching 16.9%. Neither non-solar revenues nor margins are significant at this time, as the company continues to invest in new products, and continues to voice confidence in its ability to grow both in the future.
3. Batteries
The company acquired South Korean battery manufacturer Kokam in late 2018 and Italian e-mobility company S.M.R.E. Spa in early 2019, and has been investing in developing new products for these markets. While the company views its e-mobility product as a very large opportunity, it believes it is something that may take "years" to become significant. Its battery product, on the other hand, seems like a shorter-term opportunity for additional growth. The reason is that SolarEdge has been successful in the storage market for some time, selling a third-party product, so it should be able to leverage its experience to ramp up a new product quickly.
On the storage front, however, the company acknowledged delays in its initial product launch, pushing out any initial sales until Q2 or Q3 of next year -- which, again, compares unfavorably with competitor Enphase's successful product introduction in Q3 of this year.
The bottom line
SolarEdge delivered revenue and margins well within the expectations it set for itself for the quarter. But it wasn't a blow-out quarter, and it raised questions about its revenue growth and competition. Its storage product launch schedule was slightly delayed, but it seems to be on track for 2021-- and the company clearly understands the storage market, so it has a path to succeed in it. Its mobility product sounds promising too. However, with its share price essentially tripling from a year ago at one point before the earnings announcement, Wall Street had reason to expect more.
Are there reasons to worry? Perhaps. Competition and its effect on SolarEdge's solar business is something investors should be vigilant about, but we won't know if a pattern emerges for at least another quarter or two. However, the company has a fairly broad product line which is only getting broader. And the management team at SolarEdge has almost a decade of experience making successful products, profitably, and lots of cash in its balance sheet to continue to invest in the business. With shares more than 20% below their 2020 peak, investors thinking about adding SolarEdge to their portfolios may be looking at a buying opportunity.