SolarEdge: Europe To Continue To Be Growth Driver

Since my initial bullish write-up on SolarEdge Technologies (NASDAQ:SEDG) in late March, the stock has been pretty stagnant. Let’s take a closer look at its most recent results.

Q1 Results

For Q1, SEDG reported a 44% increase in revenue to $943.9 million. The consensus was for sales of $938.9 million. Revenue for its solar segment climbed 49% year over year to $908.5 million.

The company shipped 330,000 inverters and 6.4 million power optimizers. It also shipped 221 MWh of residential batteries in the quarter. In the commercial market, it shipped 2.1 gigawatts of inverters, up 108% year over year.

Europe led the way for the company, with solar revenue more than doubling to $577.1 million. Sequentially, European solar revenue rose 22%, with Germany seeing 17% growth, Switzerland 177%, Austria 253%, and France with 31% quarter-over-quarter growth. Rest of World solar revenue, meanwhile, rose 32% $75.9 million. Quarter over quarter, ROW solar revenue climbed 30%.

U.S. solar revenue fell -4% year over year to $255.5 million. It was down -16% sequentially. The company said the passage of NEM 3.0 in California impacted the U.S., but that because the best return on investment under NEM 3.0 is achieved with a solar plus battery combination, it does see an opportunity.

Adjusted gross margin climbed 420 basis points year over year to 32.6%. They were also up 240bps sequentially. Adjusted gross margins for its solar segment were 35.0%, up 480bps year over year and 260bps sequentially.

Discussing margins on its Q1 call, CFO Ronen Faier said:

“We continue to improve our gross margin through cost reduction activities and higher efficiency within our supply chain, and we expect that future gross margin trends will be mostly driven by product, customer and geographic mix. This quarter, our gross margin results were primarily driven by an improved exchange rate between the euro and the U.S. dollar, further improvements in our shipping and logistic costs, a result of stabilized component availability and manufacturing, which also resulted in lower charges from our contract manufacturers. Offsetting our gross margin improvement was a higher portion of commercial sales that are characterized by lower gross margins and adjustments made to our warranty obligations. Good subject to tariffs, excluding batteries, shifting to the United States from China accounted for 12% of our U.S. shipments this quarter, a level that we expect to slightly decrease in the next quarters. Gross margin for our Non-Solar segment was minus 31.3% and compared to minus 4.6% in the previous quarter, a result of process stabilization costs associated with our Sella 2 ramp in Korea.”

Adjusted EPS came in at $2.90, well ahead of analyst estimates of $1.95. Adjusted EPS was $1.20 a year ago.

The company generated $7.9 million in operating cash flow compared to a cash outflow of -$163.0 million last year. It ended the quarter with $1.0 billion in net cash on the balance sheet.

When I looked at SEDG earlier, I pointed to its European exposure as the main reason I like the stock, particularly in relation to the more U.S.-centric Enphase (ENPH), which I had written about around the same time. That European exposure did indeed drive strong results, while rest of world also performed well. The U.S., not surprisingly, saw some weakness given the uncertainties surrounding NEM 3.0 in California, the country’s largest solar market. Both SEDG and ENPH saw their U.S. revenues fall in the quarter.

Perhaps one of the most impressive things to come out of the quarter was SEDG’s strong margin profile. This was an area of strength in the quarter that is projected to continue to improve. SEDG has improved its margins each of the past four quarters, and given that ENPH has margins in the mid-40% range, I see no reason SEDG shouldn't be able to have margins in the mid to high 30% range as it continues to scale.

Outlook

For Q2, the company guided for revenue of between $970 million and $1.01 billion. The consensus at the time was for revenue of $989.8 million. Revenue from its solar segment is projected to be between $930-980 million.

SEDG is projecting overall adjusted gross margins of 32-35%. Adjusted gross margins for its solar segment are expected to be between 34-37%.

The company forecast adjusted operating income of between $195-215 million.

Discussing the state of the European market on its call, CEO Zvi Lando said:

“In regards to market dynamics, we don't see right now a change in the pattern of demand in the market in Europe. Power prices have reduced to a certain extent, but they're still quite significantly higher than in the past and the return on the investment is good for both consumers and businesses, and we don't see, at least until now any change in the dynamic and the market continues to be strong. On the competitive side, yes, availability of product has increased and the market has become more competitive in that regard and more similar to market dynamics of the past, where we are competing less on the basis of availability and more on the basis of value and the premium capabilities of our solution and the other advantages in service and presence. So it's a dynamic that we've lived with for more than 10 years and are quite comfortable with our ability to obtain premium pricing for our products and solutions.”

SEDG’s Q2 guidance was solid, with margins projected to come in above its long-term plans. If this level of margins can become the new normal - and we’ll have to see as residential batteries have bit margins – it would be a nice positive for the company moving forward.

The company did note that Europe was becoming more competitive, so this is something to watch. However, its overall outlook was a positive, especially in comparison to ENPH, whose sales guidance came in below analyst estimates. And with Europe looking to re-build its solar industry in the face of moving away from Russian gas, SEDG looks well positioned to capture its fair share of this market.

Valuation

SEDG stock currently trades at 17.6x 2023 EBITDA estimates of $887.2 million. Based on the 2024 consensus projecting EBITDA of $1.05 billion, it trades at an under 15x multiple.

On a P/E basis, the stock trades at an under 27x forward P/E ratio. The current consensus is that the company will generate EPS of $11.01 in 2023. For 2024, it is projected to produce EPS of $12.97, which would be good for a P/E of 22.7x based on 2024 estimate.

The company is projected to grow its revenue by over 30% in 2023, compared to 69% growth in 2022. For 2024, sales growth is forecast to be a robust 22%.

It trades at a discount to ENPH even though it is now expected to grow quicker.

Conclusion

The current-year estimates for SEDG have gone up considerably since I last looked at the stock, but its price is actually down slightly. The company posted a great quarter and had solid guidance, but it has been punished a bit due to the disappointment in the results of its rival ENPH. At this point, the big valuation gap between the two companies seems unwarranted.

Europe should remain the big growth driver for SEDG moving forward. Increased competition is something to watch out for in that market, but the company’s strong position and Europe's green ambitions and desire to move away from Russian natural gas should bode well for continued growth.

With its estimates up and valuation more attractive than last time I looked at it, SEDG remains a “Buy.”