Some of the stock market's best performers have been companies that adapted to the pandemic. Stay-at-home and technology stocks are the obvious winners. But there are plenty of other examples, too. Industrial giants' products and services retained high demand. Traditional brick-and-mortar retailers embraced e-commerce; Williams-Sonoma saw its shares skyrocket 400% over the past year.
Solar companies were a different kind of market outperformer. Unlike other pandemic success stories that involved taking action and adjusting to a new normal, solar companies more or less kept doing what they had been doing. It worked beautifully. Low interest rates, strong demand, crippled oil prices, and investor optimism pole-vaulted large and small solar stocks to new heights. But this year, rising interest rates and other headwinds are straining solar companies. One of the market leaders, SolarEdge Technologies (SEDG 1.06%), is down 13% so far this year. After rising 235% last year, shares of SolarEdge aren't exactly a bargain. Let's break down SolarEdge's business in the wake of the pandemic to determine if its stock is worth buying for long-term investors.
An impressive growth story
SolarEdge spent the last 10 years establishing itself as a market leader in optimized inverter solutions for residential, commercial, and small utility-scale customers. These solutions help panels generate more energy, ultimately reducing costs and increasing the return on investment.
Between 2010 and year-end 2020, SolarEdge shipped 22.4 gigawatts (GW) of DC optimized inverter systems to 133 countries. The company is mostly known for its power optimizer and inverters, but it also makes electric-vehicle charging inverters, on-grid battery solutions for homeowners looking to store excess solar energy, software solutions, automated energy management technology, and various grid services. In 2019, sales from power optimizers and inverters accounted for 44.5% and 43.9% of revenue, respectively. In 2020, power optimizers contributed 42.9% of revenue, and inverters were 40% of revenue. Although optimizers, inverters, and other solar solutions make up the vast majority of SolarEdge's revenue, the company has grown other revenues from $23 million in 2018 to over $100 million in 2020.
SolarEdge's share price has increased more than tenfold over the last five years due to the company's impressive growth numbers. In 2016, SolarEdge generated around half a billion in revenue. By the end of 2019, SolarEdge was generating nearly that much revenue per quarter. SolarEdge more than doubled its annual revenue between 2017 and 2019, all the while maintaining a high gross margin. The company's combination of high revenue growth and profitability is what separates it from growth stocks in other industries, as well as from its main competitor, Enphase Energy.
The COVID-19 pandemic dampened SolarEdge's growth trajectory and strained its profit margins. Declining growth paired with a 105 P/E ratio and 71 enterprise-value-to-EBITDA ratio isn't exactly a good look. What's more, rising interest rates are a real concern for the company. In fact, SolarEdge cited interest rates as a risk factor in its annual 10-K report, essentially saying that higher interest rates could raise the cost of solar PV systems and ultimately reduce demand for its products.
Despite these short-term headwinds, SolarEdge has a unique position that could prove favorable in the coming years. Its solutions are used in both commercial and residential spaces, which is a key reason its performance held up during the pandemic. In its fourth-quarter conference call, management noted the strength of the U.S. residential market, which helped make up for commercial weakness.
SolarEdge is based in Israel and got its start in the European market. Today, it generates sales from around the world. In 2020, 42.9% of revenue came from Europe, 42% from the U.S., and 15.1% from elsewhere. The company is now a top player in the U.S. market. Therefore, it adjusted its manufacturing capabilities to avoid tariffs and other trade restrictions. The solar stock used to manufacture a lot of products in China but has since relocated manufacturing to Vietnam, Hungary, Israel, and South Korea. The company notes that this new network of manufacturing facilities will allow it to supply 85% of U.S. products without tariffs by the end of the first quarter 2021.
SolarEdge is not a cheap stock by any means. However, the company's consistent execution of its long-term growth strategy, product expansion, diverse revenue mix, and historically high gross margins are compelling reasons to like the company. In its last conference call, management guided for first-quarter 2021 revenues of just $385 million to $405 million, the midpoint of which is 8% lower than first-quarter 2020 revenue.
To justify its valuation, SolarEdge needs to return to the kind of revenue growth seen between 2017 and 2019. Given the uncertainty of a rebound happening this year, it's probably best to wait until its outlook improves or the price comes down considerably. That said, SolarEdge is a well-run company with an industry-leading position that's worth adding to any renewable investor's watchlist.