SEDG - SolarEdge Technologies: Reasons To Be Bullish

2023-03-17 14:38:43 ET

Summary

• SolarEdge Technologies is well-positioned to service the rapid growth in the solar industry.
• There are two tailwinds to this sector. Energy demand to double by 2035. Plus, the global push to decarbonize the world.
• Also, some bearish aspects for investors to consider.

Investment Thesis

SolarEdge Technologies, Inc. ( SEDG ) is a leading provider of optimized inverter system which manages photovoltaic systems. Simply put, SEDG provides the means to monitor and maximizes power generation out of solar panels, thus improving the return on investment of solar panel installation.

Given the strong push for renewables, you would expect this to be a story stock. But it's actually more than this, as it's already substantially non-GAAP profitable.

Here I highlight the medium-term drivers for this business as well as some negative considerations investors should be mindful of.

Nevertheless, I'm bullish on SolarEdge Technologies, Inc. stock.

Why SolarEdge? Why Now?

Asides from First Solar, Inc. ( FSLR ), SEDG and the rest of its peers have fallen by the side in the past several months. In fact, despite the NASDAQ ( COMP.IND ) showing a loss in the past 6 months (down 2%), as you are undoubtedly aware, given that it's been a particularly challenging time to be an investor, but the solar sector has performed even worse.

However, I'm not convinced this action is justified. Indeed, I believe that investors are being too myopic. Furthermore, I know from my professional experience that in the very short term, capital flows can take over share price movements.

There can be rotations in the market, as investors seek out safe havens, particularly when there are shocks and worries percolating through the market. Therefore, this is why investors should consider SEDG a compelling investment. Valuation is important to a stock, but it's not the only consideration.

SEDG participates in the growing solar industry that is still today in its infancy. Essentially, there are two main drivers behind the push toward renewable energy.

• High energy demand;
• The push to decarbonize our world. To make our air cleaner.

Meanwhile, as we can see above, energy demand around the world is expected to double by 2035. That will mean that the battle for energy resources will not only come from the West. But from every household, every workplace, and every street corner, around the world.

Let's use the example of electric vehicles ("EVs"). We are going to take every petrol station out of function over time.

We'll recharge our EVs from our homes, our workplaces, or street corners. And what about every wearable device? Those two will need to be charged too.

In short, we need to energy supply that conforms to 4 criteria:

• Cost-effective;
• Low carbon;
• Scalable;
• Flexible.

Meanwhile, SEDG provides solutions to a broad range of solar end markets, from residential to commercial, and small utility-scale solar installations. And SEDG is growing rapidly, as we'll now discuss.

Revenue Growth Rates to Remain Attractive

As noted already, SEDG is well-positioned to participate in the rapid uptake of the need to monitor and maintain photovoltaic systems.

The problem here is not only that SEDG is competing against the likes of Enphase Energy, Inc. ( ENPH ) to provide energy solutions for the solar photovoltaic industry, thereby largely competing on price and little else.

But also, SEGD is indirectly dependent on government subsidies to incentivize the widespread uptake of the solar energy market.

That being said, if you've followed my work before you'll have seen me say, that you want to invest in companies that are growing stronger and where analysts are over time upwards revising their financial models.

The last thing you want as an investor is to be in battle with the sell side. And as you can see above, the sell-side is revising their financial models from the bottom left to the top right.

SEDG Valuation - The Thorny Factor

The good news is that the business holds $1 billion in net cash position, which means that SolarEdge Technologies, Inc. can continue to burn through free cash flows until it reaches enough scale. Meaning that its balance sheet provides enough flexibility for the business to continue to invest for growth.

The bad news is that the business isn't that cheaply valued. Yes, SEDG has strong non-GAAP operating profits, which leaves it priced at about 22x forward non-GAAP operating profits.

But SolarEdge Technologies, Inc. must then take the bulk of those profits and plow it back into the business as capex.

The Bottom Line

SolarEdge Technologies, Inc. is well-positioned for a growing need for renewable energy. Also, the stock is attractively priced. Even though it's not the cheapest stock out there, particularly given its significant capex requirements. But its balance sheet is strong enough that it can provide the business with ample time as well as the flexibility to allow it to invest in its growth prospects.

On balance, SolarEdge Technologies, Inc. is an exciting stock with a compelling upside.

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