What happened

Shares of SolarEdge (SEDG 1.92%), one of the biggest names in solar-power inverters, tumbled 3.9% through 10:55 a.m. EST on Tuesday as stock markets reopened after the Christmas holidays. You can probably blame Daiwa Securities for that.

So what

On Friday, the Tokyo investment bank announced it was initiating coverage of SolarEdge stock with a neutral rating, while initiating coverage of SolarEdge's biggest rival, Enphase Energy (ENPH -5.56%), with an outperform rating, reports StreetInsider.com.  

The economy, in general, is looking "dour" right now, says Daiwa, but prospects still look bright in the solar industry. For this reason, Daiwa is looking for ways to invest in solar growth, especially with companies that can grow market share and gross profit margins.

Enphase is currently outearning SolarEdge. That seems to imply that SolarEdge would have more room for growth than its rival. But Daiwa says SolarEdge has been losing market share to Enphase in the U.S. A report from TheFly.com also suggests that SolarEdge's profit margins are currently negative.  

Now what

That last point doesn't jibe with reality, however. According to data from S&P Global Market Intelligence, although SolarEdge's profit margins are inferior to those of Enphase (7.7% operating margins, versus Enphase's 17.6%) and falling (SolarEdge's margins were consistently twice as high as they currently are in the years leading up to the pandemic), these margins are at least positive.

Investors should be concerned that SolarEdge's valuation -- and Enphase's, too, for that matter -- is extremely high. SolarEdge stock currently trades for roughly 152 times trailing earnings, and Enphase stock isn't cheap, either, at 135 times earnings.

Even if Daiwa is correct about the companies' growth prospects -- and most analysts agree that these prospects are bright, projecting a 35% long-term growth rate for SolarEdge and a 54% growth rate for Enbridge -- it's hard to justify the prices of these two stocks. Daiwa may think Enphase is a buy, while SolarEdge is only a hold.

I suspect both stocks are actually sells at today's prices.