SolarEdge Technologies (NASDAQ:SEDG) has been a very strong performer since its public offering at $18 per share in 2015, but it has run into some serious issues recently. Since May, shares have lost nearly three-quarters of their value; in fact, they lost more than that if we look at the performance on an enterprise basis, as the business holds a substantial net cash position.
While the pullback in the underlying results is severe, due to a myriad of factors which will be discussed further in this article, there is a long-term growth trend, sound quality products, and strong net cash balance, making the case that we are approaching interesting levels here.
A Recap
SolarEdge claims to be the #1 solar inverter company. The company has global operations in solar inverters, optimizers, and monitoring systems. Growth in the world’s population, but moreover an electrification of economies (in order to tackle the climate challenge) are key drivers behind the growth in energy consumption, which has to become sustainable as well.
SolarEdge plays a key role in this, offering integrated solutions which include EV chargers, monitoring solutions, inverters, batteries, optimizers and smart modules. Outside the residential solutions offered, the company serves commercial clients as well.
The business has been on fire as it generated revenues of $300 million in 2015 when it went public, although accompanied by GAAP profitability and operating margins of around 10%. What followed was the business expanding with revenues tenfolding to $3.1 billion in 2022, as margins have typically come in around 10%. The rapid pace of growth came at the expense of some dilution, but with the share count increasing by a third since the public offering, real revenue and earnings growth on a per-share basis were rather impressive.
The advancements were seen in the share price as well. Since the public offering, shares rose to the $50 mark in 2018 and broke the $100 mark pre-pandemic as shares actually rose to a high of around $350 in 2021 and 2022 (in fact, they traded at these levels at various occasions).
Still a $300 stock in May, shares of SolarEdge have collapsed and now trade at just $83, as demand for inverters and related products is under severe pressure. Ballooning energy prices in 2022 have retreated as the impact of the war between Russia and Ukraine is less disturbing than previously thought and feared. With this factor and congestion in grids, changed subsidy regimes, and higher interest rates, demand for new PV developments has come down a great deal.
Shedding Some Perspective
In February, SolarEdge reported a 58% increase in full-year sales to $3.11 billion. Operating earnings fell to $166 million, but this came after a $116 million goodwill impairment charge. Adjusted for that operating earnings of $282 million worked down to margins of 9%, down a bit from the year before.
The company posted adjusted earnings of $6.38 per share while posting GAAP earnings of just $1.70 per share. The gap was caused by some ten adjustments, with the asset impairment charge being a dominant factor in this, although I am not happy to adjust for a $2.64 per share stock-based compensation expense. Adjusted for this item, earnings came in at $3.74 per share, or about $210 million in dollar terms.
With 56 million shares trading around the $300 mark, at the time the company was granted a near $17 billion equity valuation, a valuation which included a billion net cash position. Note that the fourth quarter sales number of $890 million indicated that revenues trended at over $3.5 billion. This valued the operations at around 4-5 times sales, but a sky-high earnings multiple in the 70s.
2023 – A Tough Year
Following the fourth quarter earnings release, the company guided for first quarter sales at a midpoint of $930 million. In May, SolarEdge reported revenues of $944 million, while reporting a very strong operating income number of $144 million. Moreover, the company guided for further growth with second quarter sales seen between $970 million and $1.01 billion.
The company posted second quarter results on the first day of August as revenues of $991 million came in exactly at the midpoint of the guidance, with operating earnings posted at $150 million.
The headwinds which materialized during the summer were clearly seen in the outlook, as that was the reason why shares plunged to $200 overnight in August. Revenues for the third quarter were seen down to $880-$920 million.
Since August, shares of SolarEdge have fallen another 40% to $120 per share, that is at least until the update of last week. SolarEdge provided preliminary third quarter results with revenues seen at a midpoint of $725 million. The company attributes the very soft topline sales result to cancellations in Europe, push outs of backlogs in Europe, both the result of the tougher operating conditions.
The $175 million reduction in the quarterly sales guidance had a huge impact on the bottom line with adjusted operating profits seen down by around a hundred million to $12-$31 million, with GAAP operating losses now seen between $9 and $28 million.
An Update
With 56 million shares of SolarEdge trading at $83 per share, the company commands a mere $4.6 billion equity valuation here. This includes a $860 million net cash position (at least as of the end of the second quarter) indicating that the operating asset valuation comes at around $3.8 billion. This is a huge decline from earlier this year, as the sales multiple has fallen to just over 1 times.
The issue is what realistic earnings look like here. Trading at $83, we see a share with a net cash position of around $15 per share, as operating assets are valued at around $68 per share. The question is about the earnings, which are non-existing at this point in time based on the preliminary results, after earnings came in at $3.50 per share last year. Based on such earnings power, the unleveraged business would trade at a market multiple near 20 times, but these were boom earnings, and of course not be replicated anytime soon based on the near-term outlook.
Hence, we have some modeling to do. Assuming that the business stabilizes at a lower level, we might see a business with $2.5 billion in sales and 8% margins. Such a business might post after-tax earnings of around $150 million, close to $2.50-$3.00 per share, as some long-term growth should be seen as well.
Based on such an outlook, I would believe that appeal is nearly to be seen here, certainly as the company is high quality, long-term demand for its products remains, and a strong net cash position means that financial problems should not be expected.
Hence, appeal is rapidly on the increase here, and while the near term does not look too enticing, an 80% pullback since May (albeit from too high valuations from the get-go) seems like a gross overreaction, even as the near-term industry outlook remains dismal.
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