2024 has been a good year in the broader market. But that's largely the result of a few heavy-weight areas like artificial intelligence and the semiconductor industry carrying the major indices.
Dig deeper, and you'll find a slew of stocks that are selling off. SolarEdge Technologies (SEDG 2.81%), Archer Aviation (ACHR 1.00%), and Aehr Test Systems (AEHR 1.50%) are three growth stocks that are down so far this year. Here's why they could recover.
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SolarEdge is officially in a deep downturn
Daniel Foelber (SolarEdge): Between Oct. 19, 2023, and Jan. 24, 2024, SolarEdge lost 38.4% of its value.
The reason? On Oct. 19, SolarEdge shocked investors when it pre-announced Q3 2023 results ahead of its scheduled Q3 earnings release on Nov. 1. Companies will sometimes do this as a way to cushion the blow and spread out the bad news. SolarEdge had already been struggling, facing slowing growth and margin compression. But the extent of the growth slowdown had not yet been realized. Oct. 19 changed all that with a rude awakening that the industry was, and still is, truly in a downturn, and there's simply no sugarcoating that.
SolarEdge initially guided for $880 million to $920 million in revenue. Its adjusted guidance dropped that number to $720 million to $730 million. To make matters worse, it said its non-GAAP gross margin was expected to be 20.1% to 21.1%, compared to previous guidance of 28% to 31%.
SolarEdge's actual Q3 results came in line with this new guidance. But the bleeding was far from over, as the company guided for Q4 revenue of just $300 million to $350 million and non-GAAP gross margin of 5% to 8%.
The demand shortage was made all the more apparent when SolarEdge published a press release on Jan. 21 announcing that it was cutting 16% of its global workforce of around 900 employees, about 500 of whom are from its manufacturing sites. As my colleague Travis Hoium pointed out, cutting manufacturing employees is far different from administrative cuts. Reducing manufacturing headcount is a sign that business isn't good, and production needs to come down to meet slowing demand.
For now, the investment thesis looks broken.
SEDG Revenue (Quarterly) data by YCharts
Gone are the days of blistering top- and bottom-line growth rates paired with high margins. At least for now.
The stock is down over 35% in the last four years. The sell-off would make sense if SolarEdge were permanently losing market share and due for prolonged negative growth. However, if you believe the slowdown is more cyclical, then SolarEdge could start to look really cheap if it turns things around.
A turnaround could begin to take shape in the second half of 2024, at least according to comments made by Enphase Energy (ENPH 3.80%) CEO Badri Kothandaraman on the company's Q3 earnings call. For now, it's wait and see from both companies. Investors can expect a much-needed update when Enphase reports its Q4 earnings on Feb. 6 and SolarEdge reports the week of Feb. 12.
SolarEdge certainly has the products and market positioning to recover. Not to mention it is in an industry with plenty of long-term tailwinds. It just needs time to work through this cycle, gain its footing, and reset expectations.
Grounded for the first few weeks of 2024, Archer Aviation stock is ready to take off
Scott Levine (Archer Aviation): It's not every day that an innovative company comes along to provide novel transportation options. But that's exactly what Archer Aviation aims to do through its offering of electric air taxi services. The stock has encountered some turbulence early on in 2024 -- shares have slid 18.4% from the start of the year through the end of trading on Jan. 23. But there's no reason to conclude that the stock won't be able to fly higher like it did in 2023 -- especially in light of the company's recent announcements.
While Archer is still in the pre-revenue phase of its development, it's making steady progress toward commencing commercial operations. In 2023, the company shored up plans to offer its electric air taxi service to customers in Chicago. The company made further progress recently when it announced that it had inked memoranda of understanding with Atlantic Aviation, a provider of various airline industry services, to establish operations in New York City and Los Angeles, as well as Northern California and South Florida.
Extending even higher into the wild blue yonder, Archer announced a newly formed partnership with NASA, potentially expanding its options for future business. According to Archer, the "collaboration will kick off with an initial project focused on studying high-performance battery cells and safety testing targeted for Advanced Air Mobility (AAM) and space applications."
For patient investors who are comfortable taking on the risks that are associated with a pre-revenue company, Archer's recent sell-off provides growth investors with a great buying opportunity.
Don't underestimate the turnaround potential at this semiconductor testing stock
Lee Samaha (Aehr Test Systems): I'll cut to the chase. Aehr Test Systems is a risky stock, and the 36.2% decline in the share price this year testifies to that. It is exposed to the semiconductor industry risk (a highly cyclical industry at the best of times) and has stock-specific exposure. For example, in 2023, just five customers accounted for 97% of its sales. Of these five, just one, believed to be ON Semiconductor, accounted for 46.9%% of its net sales, on the basis that it accounted for 82% of its sales in 2022 .
That stock-specific exposure can lead to nosebleed share price crashes when that customer sees slowing sales, and that's precisely what happened with ON Semiconductor in October as an electric vehicle (EV) customer scaled back its expansion plans. The knock-on impact led Aehr Test Systems to lower its full-year 2024 sales forecast from $100 million to a range of just $75 million to $85 million. The reduction is highly significant, considering the company's fiscal year ends on May 31.
Still, with downside risk, there's often upside risk, and while the near-term market remains challenging, there are signs of a recovery already in play in the semiconductor industry. In addition, there's little doubt that the EV industry growth rate will pick up again, not least helped by lower interest rates in the future.
As such, all it will take is a few large orders, and Aehr's key customers will start aggressively increasing spending again. When these things happen, the upside move can be as violent as the downside. Interested investors should watch closely for what ON Semiconductor reports on Feb. 5.
