Shares of solar inverter company SolarEdge Technologies (SEDG 2.81%) were plunging in Thursday trading despite the strong market, down 9.6% as of 12:38 p.m. ET.
The company reported earnings last night that missed expectations, while also issuing guidance that came in at a stunning 50% or so below what analysts had been forecasting for the fourth quarter. In the wake of these washed-out earnings, several analysts took their price targets and ratings down today. So despite the stock having already plunged this year, shares took another leg lower.
An ugly residential solar market
In the third quarter, SolarEdge's revenue fell 13.3% year over year and nearly 27% quarter over quarter, while the company dipped into net losses of $1.08 per share, which missed expectations for a small profit of $0.11.
Analysts and investors should have known the solar market was in a severe correction. After the market boomed as early adopters took advantage of low interest rates and the Russia-Ukraine war raised doubts about energy security in Europe, higher rates, changing regulations, and easing concerns over energy security have led to a cyclical bust starting in the second half of this year.
However, the extent seems to have taken even bearish analysts by surprise. For the fourth quarter, SolarEdge management forecast revenue between $300 million and $350 million -- nearly 50% below the average analyst forecasts for $638 million. In response this morning, Guggenheim analyst Joseph Osha actually downgraded shares from buy to neutral, and Truist analyst Jordan Levy took his price down to $70 from $120. Other analysts also downgraded at other sell-side research firms.
The solar market is dealing with a bunch of headwinds all at once. First, higher interest rates have depressed demand, as residential solar systems are a big-ticket purchase that is often financed. Second, there have been recent regulatory changes in California and some countries in Europe that either limit or change net metering rules, which govern the amount of electricity a residential system can send back to the electric grid.
Both factors increase the costs of systems, and distributors are seeing cuts to demand as they adapt.
Expect the pain to continue
As much as SolarEdge and its peers have been decimated in the downturn, it's hard to step in here. Solar inverters are one-off hardware purchases, and as SolarEdge's results show, a downturn can easily flip profits into losses.
That being said, there may be a time in which SolarEdge could be a contrarian buy. The company has more cash than debt, and it's possible interest rates may be beginning to come down. For those trying to be contrarian here though, just be aware you may be trying to catch a falling knife.
