SolarEdge Stock Is Down 74% In 2024. Is It a Buy or a Sell?

Key Morningstar Metrics for SolarEdge Technologies

• Fair Value Estimate: $40.00
• Morningstar Rating: 4 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High
• Forward Dividend Yield: None

SolarEdge Technologies SEDG needs a recharge, with its stock down 74% this year. The solar panel company was already having a rough 2024. Shares fell 21% on June 25 after the firm announced a $300 million convertible note and released downbeat commentary on its expected second-quarter results. Since last July, the stock is down roughly 90%.

The convertible note was prompted by lower-than-expected cash flows in the quarter—negative $150 million—plus $630 million of convertible notes due in September 2025, according to Morningstar equity analyst Brett Castelli. “It’s less the convertible announcement that caused share price weakness and more the signal that such an announcement sends,” he says. “It potentially signals management is less confident in a rebound in its business over the coming quarters, so they wanted to raise financing now.”

It also didn’t help that a few days before, SMA Solar Technology SMTGY reduced its sales guidance by 20% and EBITDA guidance by 60% for fiscal 2024. Castelli points to lower demand for rooftop solar inverters in Europe as a key factor behind the weaker guidance. SolarEdge is a top manufacturer of solar inverters, primarily selling for residential and commercial end markets. Europe is its largest market. Castelli attributes this downturn to slowing growth in the rooftop solar market in both the United States and Europe, in addition to an increase in competition. “This has led investors to lower their long-term revenue and margin expectations for the company.”

SolarEdge became one of the largest solar inverter manufacturers based on revenue by pursuing a “top-line growth strategy,” Castelli explains, entering new market segments and regions. A downside is that “this has also entered them into markets where they have less differentiation,” such as Europe and commercial end markets. Competitor Enphase Energy ENPH has also been the victim of decreasing revenues, but Enphase has maintained much better margins due to its more differentiated microinverter and smaller presence in Europe.

Facing lower demand, not enough differentiation in its products, and a competitive European market, SolarEdge’s long-term profitability outlook will be lower than in the past. But at the same time, Castelli says, “SolarEdge’s results will rebound/normalize in the coming years. We forecast long-term gross margins (excluding manufacturing credits) of approximately 24%-25%, versus 32%-33% in 2019-21.”

Shares of SolarEdge are now trading at about $24, compared with July 3, 2023, when the stock closed at $270. “Its valuation is cheap,” Castelli notes. “Shares [are] trad[ing] at among the lowest enterprise value/sales multiples in the company’s history.”

The following are highlights of Brett Castelli’s outlook for SolarEdge Technologies and its stock. The full report and more of his coverage of SolarEdge Technologies are available here.

Fair Value Estimate for SolarEdge

We lowered their fair value estimate for SolarEdge to $40 from $53 after revisiting our long-term forecast. The reduced valuation is driven by lower long-term revenue and margin estimates. Our valuation is primarily underpinned by continued growth in the company’s solar business, coupled with growth in its energy storage segment. We forecast solar volumes to average high-single-digit annual growth in the longer term after sharp declines in 2024 due to excess inventories. We expect continued declines in average selling prices, forecasting mid-single-digit-per-year declines in the long term, following much steeper pricing declines in 2024, given industry oversupply.

Read more about Morningstar’s fair value estimate for SolarEdge stock.

Economic Moat Rating

We do not assign SolarEdge a moat, as we don’t have enough confidence that its excess profits will last beyond 10 years, the threshold to justify a narrow moat rating. While SolarEdge devotes 8%-10% of its sales to research and development, we don’t believe this has led to a large enough gap between it and its competitors. For example, SMA Solar and Huawei have released products that are very close substitutes to SolarEdge’s. In addition, the company typically unveils a new product generation every two to three years, which we do not view as prohibitively long. Further, competitors can typically replicate many features in relatively short order.

Read more about SolarEdge’s economic moat.

Financial Strength

We do not see any material negatives in SolarEdge’s financial strength. The company has been consistently profitable since becoming public in 2015 (a rare feat in the industry) and views its strong financial position as an asset. SolarEdge has generally pursued a capital-light approach by outsourcing manufacturing but has departed from this strategy recently with a manufacturing facility near its headquarters in Israel and a battery manufacturing plant in South Korea. That said, we think the company will primarily continue to outsource its manufacturing needs long term.

Read more about SolarEdge’s financial strength.

Risk and Uncertainty

We assign SolarEdge a very high uncertainty rating. SolarEdge’s solar business is cyclical and can depend heavily on government policies. Additionally, its storage and e-mobility businesses are nascent today, and estimating future growth is highly uncertain.

In its solar business, we see uncertainty regarding policies in the US residential market related to net energy metering. We also see high uncertainty in forecasting SolarEdge’s nascent storage businesses. Energy storage is in its early days, with many credible competitors vying for a share of the market. There is significant uncertainty in forecasting the overall market size (in terms of megawatt-hours) and average selling prices beyond 12-18 months.

Read more about SolarEdge’s risks and uncertainty.

SEDG Bulls Say

• SolarEdge is one of the largest solar inverter manufacturers in the world based on revenue.
• SolarEdge trades at a sharp valuation discount to peer Enphase.
• Potential policy incentives to address climate change have the potential to meaningfully increase annual solar installations.

SEDG Bears Say

• SolarEdge does not enjoy the same competitive position in Europe as in the US.
• SolarEdge’s acquisition track record has faced challenges.