nattrass
The solar sector has faced a brutal year as demand surged in 2022 following the Russian invasion of Ukraine and the globe fell under heightened energy concerns, especially in Europe. SolarEdge Technologies (NASDAQ:SEDG) has now faced an extended period of weak sales and even lower product shipments due to excess channel inventory. My investment thesis has now shifted more Neutral on the stock, as the solar sector exits the seasonally weak period with a better inventory dynamic going forward.
Source: Finviz
Under Shipping Demand
SolarEdge reported another brutal quarter to end 2023. The company reported sales of $316 million, down 65% YoY. The key to the story is end demand was some $200 million higher at close to $500 million.
The solar industry solutions provider was hardly generating quarterly revenue above the Q4 level prior to the Covid hit. SolarEdge saw demand soar 200% by mid-2023 reaching nearly $1 billion in sales for Q2’23.
Sales have now collapsed and the big question is where sales will shake out when the market normalizes and starts growing again due to long-term trends in electricity from EVs. According to management, the company under shipped demand by the following quarterly amounts:
- Q1’24E: ~$200M, $250M+ under shipped
- Q4’23A: $316M, ~$200M under shipped
In essence, the guidance is for sell-through revenues of ~$500 million per quarter. SolarEdge and the industry was preparing for sales double those levels, but distributors have instead asked the company to reduce contracted volumes with inverter shipments in Q4 down nearly 80% from the recent peak to only 74K units.
Source: SolarEdge Technologies Q4’23 presentation
Not only is SolarEdge under shipping actual end user demand, but the company also predicts new products will increase demand. On the Q4’23 earnings call, management guided to a quarterly revenue run rate in the 2H of in the $600+ million range as follows:
Considering the market dynamics that we have discussed as well as normal seasonality patterns, we expect to reach an underlying business run rate of $600 million to $650 million in the second half of the year.
The problem facing SolarEdge is that the company will continue under shipping demand several quarters into 2024. In addition, inventory levels are very elevated jumping to $1.44 billion and A/R soared due to extending payment terms on a few customers.
The A/R balance dipped from the prior quarter due to the lower sales levels, but DSO jumped to 265 days in Q4, up from only 149 days in Q3. SoldarEdge now has enough inventory on hand for the whole year at this rate and customers aren’t even paying for what was shipped already and likely still in inventory.
While the business turndown was abrupt, SolarEdge has only faced a downturn for a few quarters now. The company didn’t hit the market with concerning forecasts until guidance for the Q3’23 numbers on August 1.
One of the biggest risks to the business is ongoing high interest rates. The U.S. just printed a final Q4’23 GDP of 3.4%, above 3.2% consensus, leading Fed Chairman Powell to suggest the Fed was in no hurry to cut interest rates.
Normalized Numbers
A key exercise to understanding where the business will be when shipments match sales in a more normalized business environment is to run the numbers on financial targets. SolarEdge management provided these general financial targets going forward:
- Revenue – $2.5B ($625M/quarter)
- Gross Margins – 30% (5% IRA benefit)
- Operating Margins – 10%
- Operating Income – $250M
- Taxes – $63 (25% estimate)
- EPS – $3+ (60M diluted shares)
These numbers don’t add up to SolarEdge being a compelling investment with the stock back up at $71. For this reason, Janney cut the stock to Neutral with a $63 price target.
The stock trades at over 20x normalized EPS targets assigned by SolarEdge management. The company still has to deliver those sales levels via the new production launches, which include growth of ~$125 million in revenues per quarter above the current sell through rate. The sell through rates support SolarEdge holding closer to the current price levels, but investors due need to watch inventory levels and A/R balances before the stock is completely safe.
Takeaway
The key investor takeaway is that SolarEdge now forecasts some stability in end user demand, but the company still expects more weak results ahead. The smart energy solutions company continues to under ship demand by a large amount with the likelihood management provides more encouraging guidance for the upcoming Q1’24 report, though high interest rates won’t help solar demand recover.
