Shares of SolarEdge Technologies (SEDG 3.91%) fell 23.4% in August, according to data from S&P Global Market Intelligence. The company, which sells power inverters for solar panels as well as other clean energy technologies, posted disappointing earnings for the second quarter of 2022.
On top of earnings, there was an announced investigation that could ban SolarEdge's products from getting imported into the United States (the company is based in Israel).
On Aug. 2, SolarEdge reported earnings for the three months ending in June. Revenue was $727.8 million, up 11% from the prior quarter and an impressive 52% year over year. Unlike a lot of clean energy and technology companies, SolarEdge is profitable, generating non-GAAP earnings per share (EPS) of $0.95 in Q2. However, EPS was actually down from $1.28 in the year-ago quarter.
Both these metrics -- revenue and EPS -- came in below analyst expectations heading into the report. Surveyed analysts expected $730.7 million in revenue and an adjusted EPS of $1.38 for the period. While not huge misses, this is the key reason why SolarEdge's stock was down so much in the following days.
Earnings were a slight disappointment, but the key risk hitting SolarEdge is a potential import ban. In late August, the U.S. International Trade Commission (ITC) stated it was investigating SolarEdge after a competitor, Ampt, alleged its technology violated two of its patents.
If the investigation goes in favor of Ampt, this could lead to a ban on the import of SolarEdge's products, which adds a short-term risk that investors might not want to take right now. It is unclear how likely an import ban is, so don't think this is a thesis buster if you own shares, but it definitely adds more uncertainty for SolarEdge investors.
Even after the recent drawdown, SolarEdge's stock is up 1,000% over the last five years -- and for good reason. The company has consistently grown its revenue at a solid double-digit rate, leading its top line to grow from under $500 million in 2016 to almost $2.5 billion (on an annualized basis) today. With the growth of the solar panel market, it is hard to not be optimistic about SolarEdge's future prospects, as long as it doesn't face an import ban.
However, the stock trades at an expensive valuation, with a trailing price-to-earnings ratio (P/E) of 120. This is expensive no matter how you slice it and adds another layer of risk for investors thinking of buying on this recent dip.
If you are going to buy some shares of SolarEdge stock, you need to be confident the company can continue growing its revenue at a fast rate and generate steady profitability. If this doesn't happen, the stock will likely perform poorly over the next five to 10 years.