SolarEdge Technologies (SEDG -3.93%) has been one of the top-performing solar energy stocks over the past decade, and for good reason. The company has become a go-to component supplier for residential solar installers, and expanded into commercial solar and energy storage.
For years, SolarEdge has been a growth stock in a growth market. But the growth narrative has taken a hit in the past year as the pandemic and competition ate into results. With growth slowing and the stock price still high, is this an overvalued stock or a buying opportunity coming out of the pandemic?
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The financials
Financially, the stock is up 1,060% over the past five years, revenue is up 193%, and net income has increased 67%. But you can also see that SolarEdge's revenue growth has stalled over the past year, and even declined slightly.
SEDG Revenue (TTM) data by YCharts
Revenue growth is slowing and even may be slightly negative despite solar energy being a growth industry (as I'll highlight below). Is SolarEdge revenue falling because of pricing pressure, lost market share, or something else?
Competition is already here
A slowdown in solar installations is often blamed for weak results, but according to the Solar Energy Industries Association the U.S. installed 19.2 gigawatts (GW) of solar in 2020, up 43% versus a year earlier, and residential solar installations were up 11% to 3.1 GW. Yet SolarEdge's revenue rose just 2% for the year.
One big reason for the weaker results was increased competition. Microinverters from Enphase Energy (ENPH -2.57%) are taking market share, and solar panel manufacturers are starting to install microinverters at the factory. You can see below that Enphase has grown more quickly than SolarEdge over the last three years, and has expanding margins, compared to SolarEdge's contraction.
SEDG Revenue (TTM) data by YCharts Note: Gross profit margin chart represents change in gross margin, not absolute gross margin.
SolarEdge has also become so dominant in power optimizers for residential solar installations, its core product, that it had little room to grow by taking market share. In fact, it had a lot to lose as Enphase took market share in residential solar. According to Ohm Analytics, SolarEdge's inverter market share in eight key states in the U.S. fell from 56% in January 2019 to 40% in December 2020. Over the same timeframe, Enphase's market share doubled from 24% to 48%.
The other negative trend is that solar panel installers are always looking to lower costs by integrating products at the factory level or reducing the number of components -- as microinverters do -- to make installation easier. SolarEdge was once the new, innovative product in the market, but now the competition is taking some of its business, and we're seeing that in the results.
A history of innovation
Trends may be negative for SolarEdge, but the company has proven its ability to innovate and expand into new markets over the past decade. Right now, it's trying to translate a market-leading position in power optimizers and inverters into a leading position in energy storage, which solar installers think will be the next big growth market for the industry.
The strategy makes sense, as SolarEdge is already the "brains" of the solar installation, but there's no guarantee it will be able to move into the energy storage market successfully. And as installers like Sunrun and SunPower develop their own energy storage solutions, it could crowd out SolarEdge in the energy storage market.
SolarEdge is also trying to expand in commercial and utility-scale solar markets. But keep in mind that these have typically been extremely competitive and very low margin for component suppliers, so revenue growth in these areas may not lead to a big increase in profits.
Hefty price to pay
SolarEdge still has a market cap of $12.6 billion on revenue of $1.4 billion and earnings of just $128 million. That's a P/E ratio of about 100 for a company whose revenue is flat or declining slightly and appears to be losing market share.
The solar industry should be a growth industry long-term, but that doesn't mean every stock will do well. After years of expanding market share and increasing its product line, SolarEdge is facing new competition and pricing pressure from solar installers. And with a hefty price tag on the stock, this is a company I wouldn't be buying today.
