Company Overview: SolarEdge Technologies, Inc. (NASDAQ: SEDG) provides DC-based solar inverter, power optimisers, smart energy devices, and cloud monitoring systems for residential, commercial installations, and small utility-scale solar installations. The company caters to customers in solar PV systems, solar distributors, and electrical equipment wholesalers as well as several PV module manufacturers. SEDG started its operations in 2006 with manufacturing facilities in just 3 countries. The company has outgrown with a presence in over 30 countries and its solar products are being shipped in 133 countries.

SEDG Details

Progression from Invertors to Smart Energy: SolarEdge Technologies fostered a DC-based optimized inverter architecture solution as it believes the new technology will be a game-changer in lowering the cost of energy produced by the PV systems.

SEDG widened its product portfolio through an organic and acquisitive growth strategies. It had started-off with optimised inverters with an output capacity of 3kW-6kW and forayed into high-powered utility inverters using third-generation integrated circuits with capacity upto 380kW catered for commercial installations. It had brought the world’s first EV charger with an integrated PV inverter. Since the beginning of commercial shipments in 2010, SEDG has shipped ~16.2 GW of inverter systems.

The company has added adjacent capacities in uninterrupted power supply (UPS), energy storage solution (ESS), and e-mobility solutions.

Figure 1. Increasing the Average Revenue Per Installation Through Broad Portfolio

Source: Company Reports

SEDG forayed into smart energy technology with three acquisitions in 2018 and 2019 – it had acquired assets of Gamatronic Electronic to foray into UPS business for a wide range of applications. The company further ramped-up UPS products in the high-powered 500kW segment. With the acquisition of Kokam, the company forayed into the manufacturing lithium-ion cells. It became the global tier-1 battery provider for utility-scale ESS, UPS, EV technologies. SEDG gained a foothold in integrated powertrain technology for motorcycles, commercial vehicles, and trucks through the acquisition of S.M.R.E. Spa.

The company strengthened its portfolio intending to increase the average revenue per installation. It intends to grow customers in adjacent capacities, grow internationally and unlock additional revenue streams. SEDG aims to increase market share in the commercial and industrial segment and deepen the utility segment through rigorous research and development. 

Figure 2. SEDG To Upsize Commercial and Utility Segments

Source: Company Reports

Historical Financial Trend:

SEDG is ramping-up capacities to meet the increased demand for solar products. It had opened a new manufacturing site in Vietnam in December 2019 and is expecting to reach full production capacity. Further, the ramping-up of capacity in the Sella 1 factory in Israel is progressing as per plan. Expansion in margin was because the company’s products were predominantly procured through contract manufacturers who are closely located near the target market to reduce turnaround time and shipping costs. The company aligned contract manufacturers from low or no tariff imposed countries to benefit from lower pricing of its products.

Figure 3. Historical Financials of SEDG

Source: Company Reports

SEDG reported upward trending revenues in FY19 driven by increased offtake from customers in Europe, the US, and Israel. Price increase on the products sold in the US to offset tariff hikes at China contributed to the topline growth. Besides, the company’s other segments representing UPS, storage systems, and e-mobility witnessed a substantial rise over the prior year.

Figure 4: Revenue Split by Products and Geographies

Source: Company Reports

Incremental costs associated with air freight shipping and increased R&D spend ($121.3 million in FY19 vs. $82.2 million in FY18) pulled down EBITDA margin at 15.2% in FY19 as compared to 16.2% in the prior year. Integration of new businesses added employee costs and increased general and administrative expenses, but net profit improved by 13.2% in FY19.

Figure 5. FY19 Key Financial Highlights

Source: Company Reports

Q3 FY20 Updates:

SEDG witnessed lower demand from commercial customers owing to COVID-19. Residential business in Australia was supported by the launch of a 3-phase 600V inverter. Europe posted healthy installation rates. Collaboration with Schneider Electric posted an improvement in the US new home segment. The company is in-progress to supply the first batch of full powertrain solutions to an automotive OEM. It expects that 60% of US products will be secured through non-tariff regions going forward.

Figure 6. COVID-19 Affected Commercial Offtake

Source: Company Reports

R&D expenses continued to increase owing to new product development particularly in non-solar business (UPS, storage systems, and e-mobility), along with increase in R&D headcount and sub-contracting costs. EBITDA margin remained stable at 11.4% in September’20 quarter (on QoQ) basis). SEDG closed the quarter with a cash balance of $1,048.1 million, up from $233.9 million in December 2019. Issuance of convertible senior notes for net proceeds of ~$618.3 million lifted the cash balance. The convertible notes mature in September 2025. During the nine months, the company’s subsidiary Kokam entered into a new loan arrangement for $15.6 million. Other than this, the company had no borrowings under bank credit facilities.

Figure 7. Surge in R&D Spend

Source: Company Reports 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms ~37.76%. BlackRock Institutional Trust Company, N.A. Swedbank Robur Fonder AB holds the maximum interest in the company at 8.62% and 6.07%, respectively.

Figure 8. Top 10 Shareholders

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: SEDG maintained a stable EBITDA margin at 11.4% in September’20 quarter in-line with the preceding quarter but lower than last year due to an increase in the cost of materials and lower offtake from commercial customers.  Nevertheless, the company’s net margin of 12.9% was higher than the Industry Median of 12.0% in the same period. It had clocked ROE of 4.5% higher than the Industry Median of 3.3%, benefiting from contract manufacturing. Debt-to-equity increased to 0.57x as of September’20 from 0.02x in the preceding quarter as the company raised convertible notes.

Figure 9. Key Financial Metrics

Key Metrics (Source: Refinitiv, Thomson Reuters)

Outlook: SEDG is expecting to increase average revenue per installation from smart modules, inverter, and battery through new launches such as combined back-up solutions. Its e-mobility division provides access to the high-growth global EV market. SEDG is looking to procure ~60% of US products from non-tariff regions through establishing its own facilities or contract partners. Management provided guidance with revenues to be in the range of $345 million to $365 million for Q4 FY20. Revenue from solar products is expected to be within the range of $320 million to $335 million. Gross margin (non-GAAP based) to be in the range of 32%-34% for Q4 FY20.

Key Risks: SEDG is exposed to credit risk with a single customer who accounted for 20.4% of revenue in FY19. And one customer accounted for ~32.1% of trade receivables. The company is highly dependent on contract manufacturers and imports from China for its products. The ongoing trade tension resulted in the imposition of tariff hikes for solar products which resulted in a higher cost of materials and subsequently the company passed on the price hike to customers. Considerable exposure to Europe may expose the company to geopolitical risk. Seasonality variations affect the deployment of solar panels. SEDG is indirectly dependent on government subsidies and grants for manufacturing solar PV modules. The roll-back of the production tax credit in the US may widen cost synergies and scale economies.

Figure 10. Key Valuation Metrics

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Enterprise Value to EBITDA Multiple Based Relative Valuation (Illustrative)

Enterprise Value to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: SEDG yielded a positive return of 73.17% over the past 6-months, however, slightly corrected by -6.18% and -4.76% respectively over the past 1-month and 3-months. The stock is currently trading higher than the average of the 52-week high price of $377.00 and 52-week low price of $67.02. On the technical analysis front, the stock has a resistance level of ~US$323.70 and a support level of ~US$281.89. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. For this purpose, we have taken peers like Sunnova Energy International Inc. (NYSE: NOVA), Enphase Energy Inc. (NASDAQ: ENPH), Array Technologies Inc. (NASDAQ: ARRY). Considering the rapidly growing revenues backed by progression in smart energy technology, solid cash balance sourced from the issuance of convertible notes, management commitment in non-solar business, we give a “Buy” recommendation on the stock at the current market price of US$295.05, up 4.53% versus the previous close on January 19, 2021.

SEDG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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