The valuations of companies across the solar power industry have soared this year -- and with those higher stock prices come higher expectations for growth.
High expectations are exactly why SolarEdge Technology's (SEDG 5.60%) shares got pummeled during the last month. And if it's starting to lose market share, those shares may continue their slide.
Image source: Getty Images.
What SolarEdge reported in Q3
For starters, we should ground this discussion in some metrics from 2020's third quarter. Management announced that SolarEdge's revenue fell by 17.6% to $338.1 million in the quarter, as the number of power optimizer units shipped declined by 28.7% to 3.3 million and the number of inverters shipped slid 18.8% to 152,500 units.
Some may be tempted to overlook those declines in shipments and revenue because the residential solar industry has had a tough year. But the deeper we dig, the more we find fundamental problems with SolarEdge's business.
SolarEdge may be losing market share
What I'm most concerned about for SolarEdge is that it may already be losing market share. The table below lays out unit shipment changes between Q3 2019 and Q3 2020 for SolarEdge and microinverter competitor Enphase (ENPH 1.74%), and then uses SunPower (SPWR +0.00%) and Sunrun (RUN 0.24%) as proxies for the industry overall because they're rooftop solar installers. Unit sales of its power optimizers have sunk more sharply than Enphase's microinverter shipments, and have fallen considerably more than SunPower and Sunrun's installations. We also know that SolarEdge's megawatts shipped to residential customers were down 25.9% in the third quarter of 2020, another indicator of lost market share in the residential space.
| Company | Q3 2019 | Q3 2020 | Change |
|---|---|---|---|
| SolarEdge (power optimizers) | 4.59 million units | 3.27 million units | (28.7%) |
| SolarEdge (inverters) | 187,900 units | 152,500 units | (18.8%) |
| Enphase | 1.80 million units | 1.44 million units | (19.7%) |
| SunPower | 42 MW | 36 MW | (14.3%) |
| Sunrun | 107.2 MW | 109.5 MW | (2.1%) |
Source: Company earnings releases.
We can look at market share losses another way by comparing SolarEdge's revenue to Enphase Energy's. The revenue trends indicate that power optimizers are losing ground to microinverters, and that has to be a concern for SolarEdge shareholders.
SEDG Revenue (TTM) data by YCharts
Ebbs and flows are natural in any industry, but longtime solar energy sector investors know that the industry has undergone multiple fundamental shifts over the years. The concern for SolarEdge is that it might be headed into another one.
We've seen this movie before
The hardware business has always been perilous for solar companies. Power-One was once the dominant inverter supplier for residential solar installations, before it was bought and sold twice, and then became virtually irrelevant. First Solar (FSLR 1.32%) once dominated the industry and commanded margins over 50% for its solar panels, only to see Chinese manufacturers commodify them. And even in China, manufacturers like Suntech Power and Yingli Green Energy have gone from the top of the industry to collapse almost overnight. So, we should all be aware that competitive advantages in this industry are fleeting.
If SolarEdge continues to lose market share, it's decline could snowball quickly. And there's nothing preventing from installation partners switching to a new platform from Enphase or SunPower, which provide solutions similar to those of SolarEdge. Installers big and small choose the hardware and platform partners they work with and aren't tied to any partner long-term, so the business isn't very sticky. If partners decide another platform solution is better, they can easily make the switch as they did away from Power-One, Suntech, and Yingli. Operationally, that's the risk.
From an investment standpoint, the concern is that SolarEdge is an incredibly expensive stock that may be past its best growth years.
SEDG PS Ratio data by YCharts
All of this makes me very uneasy about SolarEdge's stock today. I'm even adding an underperform call to it on My CAPS page, which will track whether SolarEdge indeed underperforms the market. A lot of optimism is priced into this solar stock, but right now, I don't see enough evidence that the company will live up to those lofty expectations.
