Solar Edge Technologies, INC.

Solar Edge Technologies (SEDG) is in the business of optimizing the efficiency, safety, and cost of photovoltaic systems also known as solar power. Solar Edge’s revenues have grown 7.7x from $79 million to $607 million in the last five years. The company has a return on equity of 29.81%, with an industry average of -7.55%. Operating margins have increased 73% from 8.69% in 2015 to 15% in fiscal year 2017. Capex has grown at an average of 22.6% the last four years with revenues showing a 44% annual growth rate. Solar Edge has zero debt on its books. The market is currently offering Solar Edge, a fast growing and innovate business at a significant discount to intrinsic value due to valid, but potentially excessive concerns surrounding the current administrations trade tariffs on solar imports.

When a homeowner or business is looking to install a solar power system, there are two conventional ways of doing so. The first is a traditional string inverter system. The solar panels are wired in a series as a string, and the direct current is carried to an inverter that converts the direct current into alternating current. However, there are problems with this approach. All of the solar panels must be at the same length, angle, and type in order for the system to work. This limits the available roof space due to how the panels must be configured. The entire string is limited to the weakest link since all the panels work as one unit. If there are any problems with the system, there is no way of knowing which individual panel is causing the issue, making it hard to maintain, monitor output, and fix. Any shade or small defect in a single panel reduces the output of the entire system. There is also no way to turn off or reduce the DC voltage coming from the panels when the sun is shinning, causing potential risk for firefighters, installers, and electricians.

The second option for those who wish to go solar is the micro inverter route. The micro inverter approach takes the traditional string inverter and scales it down to fit each individual solar panel. Now you have the inverter itself exposed to the elements on the roof of your house. If anything were to malfunction, you would have to access the roof of your house to fix the micro inverter. Since there are now more components involved the upfront and maintenance cost are substantially higher compared to a string inverter system. The micro inverter system does solve two problems found in the string inverter system. You now have each solar panel being controlled individually, improving total output, as well as being able to place the panels anywhere on your roof.

How can we expand on what the micro inverter system offers, while keeping the price of the system competitive, user-friendly, safe, and efficient in its DC output? This is where Solar Edge Technologies DC optimized inverter system comes into play. Solar Edge has a three-pronged approach to this problem. The first product is a power optimizer with a DC-to-DC conversion that is connected to each PV module. These power optimizers allow the user to track and adjust real-time current and voltage to the optimal working point of each panel. Since each panel has an optimizer, you can configure the panels in any way to optimize the surface area of your home or building. The second is a DC-to-AC inverter that converts the direct current into usable alternating current. With micro inverters, this aspect is attached to each panel leaving it exposed to the elements, subject to damage, and hard to access. Solar Edge solved that problem by only having the optimizers exposed while the inverter system is protected within the client’s home or building. The inverter simply converts direct current to alternate current for use. This AC current is what is used as electricity to power homes and other appliances. Finally, this is all tied into a cloud based monitoring software for easy access to current data regarding your photovoltaic system. The monitoring platform provides full data at the panel, optimizer, inverter, and system level. This allows for immediate fault detection, real time alerts, and comprehensive analysis, which can reduce operation and maintenance cost. There is also a safety feature built-in that allows you to reduce the DC voltage to a safe level whenever the AC power is turned off. This is extremely important for those who service and install PV systems, as well as for fire fighters and police in an emergency situation.

Solar Edge is the only company to my knowledge with this unique two-part system that also incorporates the cloud monitoring software. With many home appliances being controlled from either a mobile device or tablet, I think Solar Edge is at the forefront when it comes to software application in the solar market. The closest comparable company to Solar Edge is Enphase Energy (ENPH). This company is roughly one-third the size of Solar Edge, and is in the business of making micro inverters. As discussed above, I believe Solar Edge offers a more competitive and unique system compared to Enphase’s classic micro inverters.

With the qualitative aspects covered, let’s dive into some quantitative analysis. The business is currently trading at 8.8X enterprise value to EBITDA. The company is currently on track to put up record top and bottom line growth for 2018 with estimated revenue growth of 45% YOY. Below is a conservative discounted cash flow model showing SEDG if it continues to grow at 22% the next five years. With an estimated value per share of $63.03 and a current price of $38.08, the stock is currently trading at a 40% discount to intrinsic value.

SEDG DCF

I am not in the efficient market camp, but I do believe the market is pretty efficient, most of the time. So why is SEDG trading at such a discount? The solar industry got hit with 30% import tariff in October 2018. Below is an excerpt regarding the subject of tariffs from Solar Edge’s 2017 annual report.

“On January 22, 2018 a tariff was adopted in the U.S. on imported solar modules and cells, approving, with limited changes, the recommendation of the U.S. International Trade Commission that was announced on October 31, 2017. An initial 35% tariff was imposed on all imported solar modules and cells, with a gradual reduction over four years to 15%. These tariffs do not apply directly to out products. It is uncertain what affect, if any, these tariffs may have on the price of solar systems in the United States. If the price of solar systems in the U.S. increases, it would likely reduce the number of solar systems manufactured and sold, which in turn may decrease demand for our products.”

 

According to the latest EnergySage Solar Marketplace Intel Report, the cost of a solar installation is now 5.6% higher due to President Trump’s solar tariff. But as noted the tariff will decline to 15% over the next four years. Also, taking into consideration that this tariff is expressed as a percentage, if the cost of producing solar panels continues to fall as economies of scale take effect, the purchase price on the consumer’s side will fall as well. Historically, the price of solar panels has fallen 2-6% over the last several years.

According to Solar Energy Industries Association, the solar market as a whole has grown at 59% over the last 10 years, generating enough electricity to power 11 million homes. With consistent growth in a market place like this, I believe that this tariff, which will decline over time, and could be temporary depending on the possibility of a new administration in 2020, has provided a unique opportunity to acquire a great business at a fair price.

Another aspect to take into consideration is the Investment Tax Credit (ITC). This is a federal tax credit, which allows homeowners and businesses to qualify for a federal tax credit equate to 30% of the cost of the solar system. Some states also offer additional tax credits for installing a solar system, though the amounts vary significantly. This tax credit could help offset any temporary price increases due to the current import tariff.

Disclaimer

This blog is based on my own personal opinions and views and should not be taken as professional investment advice. Market speculation is very risky, and you should do your own research before deploying capital. Any action you take upon the information provided on this website is strictly at your own risk.

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