SolarEdge Is Set To Benefit From The Energy Storage Mega-Trend

| About: SolarEdge Technologies (SEDG)

Summary

US residential installation has been booming, registering a 76% growth in Q1’15 and 69% in Q3’15, annually.

SolarEdge registered a 70% yearly growth in topline with 31% gross margin, shows its differentiated value proposition in a commodity industry.

Company is focusing on innovative technology coupled with reducing cost of production.

Solar Storage set to become the next big green mega trend and SEDG is a good way to play this trend.

The market is giving an excellent opportunity to invest in high-quality solar stocks, which have been battered due to fears of a Chinese economic slowdown and a decline in oil prices. SolarEdge Technologies (NASDAQ:SEDG) is 39% up from the last time I recommended buying this stock. Its market capitalization value has also increased from $890 million to more than $1 billion today. The company has been showing good performance consistently and has once again delivered in its most recent quarter. It is one of the few solar stocks to show a price increase, while others have shown a major decline. SolarEdge has a comprehensive product portfolio and offers a good value proposition with its solar panel electronic products. The cost of solar plus energy storage is also coming down, which should make it a viable option in a few years for customers. This will lead to another major growth spurt as consumers will be able to go off the grid. Companies playing in this space have a massive opportunity. I think SolarEdge is a good way to leverage from this emerging green mega trend.

Why is SolarEdge a good stock

1) Strong growth is expected in solar energy storage - Strong growth in solar storage is expected to be generated by all three major segments of the market - residential, commercial and utility scale. The rise of solar markets in Japan and China is boosting the rapid growth of the PV inverter business. Solar storage is also seeing rapid growth in developed markets of Europe and Japan where the electricity costs are extremely high, making even storage + solar systems competitive with grid power. There is no doubt that solar energy storage in both utility scale and distributed generation will grow rapidly in the coming years. Solar + storage is expected to be a huge threat to the utility industry, as energy storage costs are expected to see a >50% cost reduction in the next 5-10 years. By 2020, solar plus storage costs are expected to reach parity with retail electricity prices in a number of places.

Residential solar installations in USA are also increasing at a steady rate as can be seen from the table below:

Residential Total As a % of Total
Q1 15 400 1329 30.1
Q2 15 463 1393 33.24
Q3 15 519 1361 38.13
Click to enlarge

2) Innovative Technology with reducing costs - SolarEdge provides an extensive range of PV inverters, power optimizers, and module-level monitoring services. The company introduced its new HD wave technology, which is designed to reduce the size of the inverter's magnetics by means of advanced digital processing, at the same time increasing performance of solar energy systems to more than 99% efficiency. StorEdge is designed to store solar energy in a battery for use at a later time. It will promote energy consumption when electric demand from the grid is low and vice-versa. It is also compatible with Tesla's (NASDAQ:TSLA) Powerwall. These two products which were introduced in late 2015 are already getting traction in the energy storage market. StorEdge is already available in some international markets like Australia, and Europe.

"We believe HD-Wave represents a significant milestone for solar inverter technology, akin to the transition from large glass tube TVs to the flat-screen," stated Lior Handelsman, VP Marketing and Product Strategy of SolarEdge.

Source: SEDG News

Click to enlarge

Source: Solaredge

3) Good quarterly performance - Revenues reported for the most recent Q2'16 was $125 million, which increased 70% when compared to the last year. Gross margin stood at ~31%, as against 29% in the prior quarter and 21.5% in Q2'15. The quarter was also marked by installation of SEDG's first HD-wave inverter units and shipments of StorEdge solution. The company shipped 416 MW of inverters. EPS too improved to $0.55, up from $0.32 in the prior quarter.

Revenues expected to be ~$121-125 million and gross margin between 29% and 31% for Q3'16.

Downside Risks

a) Utilities are fighting back against residential solar growth - With Nevada increasing the fees for solar homes and California too imposing extra costs on new NEM customers, utilities are fighting back against the exponential growth of solar energy. However, the growth of solar energy is inevitable in my view, as the costs are continuously declining. Solar power is expected to hit 95GW mark by 2022 that will be enough to power 19 million homes, according to SEIA. USA expects to install 13 GW in 2016 and 15 GW in 2017, as estimated by IHS Research. As solar penetration increases, grid balancing and integration will become more and more important. In such a scenario, energy storage will become critical.

b) Technology changes - The solar market is highly dynamic and leaders of the past can suddenly become bankrupt due to changing market conditions and technology. Enphase Energy (NASDAQ:ENPH) which used to be the leading player in micro inverters, has been losing share to SolarEdge as its technology is not as cost-effective as SolarEdge. The same can happen to SolarEdge as well, because major companies such as SMA Solar (OTCPK:SMTGF), ABB (NYSE:ABB) and Schneider are constantly innovating in this space to come up with better products.

Stock performance & Valuation

The stock is trading at ~$26 which is close to the mid-point of its 52-week range. The stock price has increased to the $25-30 range from the $15-20 range in November 2015. The company has a market capitalization of ~$1 billion, with a P/E of ~20x. The stock returned more than 25% in the last one year, while its peer Enphase Energy was down 84%. I think the stock has potential to give good returns, once the weakness in the energy sector is over.

Conclusion

Solar plus Energy Storage is set to become the next big green mega trend, as energy storage is also one of the best solutions to solve the problem of grid integration. The solar inverter market was estimated at ~$7 billion in 2015 and according to GTM research, global solar installations are expected to increase to 135 GW by 2020 (from around 60 GW now). Technology is definitely the key to success in solar industry and will also lead to more cost improvements. According to ITRPV, solar panel costs will decrease to 33 cents/watt by 2024 down, from around 55 cents/watt now. Solar inverter costs are also expected to decline at the same rate. SolarEdge will benefit from its technological edge and competitive advantage over other microinverter players (Enphase Energy). SolarEdge is definitely a buy in my books.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.