SolarEdge Earnings: Firm’s Not Immune to End-Market Weakness, but Selloff Appears Overdone
We lower our fair value estimate for no-moat SolarEdge SEDG to $238 per share from $277 following second-quarter results. The reduced valuation is a result of a decrease in our medium-term revenue and gross margin expectations following weaker-than-expected guidance. SolarEdge shares were trading sharply lower (down 18% at the time of writing), but we increasingly view the selloff as an opportunity.
While weakness in U.S. rooftop solar demand has weighed on shares across the industry, many (ourselves included) expected SolarEdge to be more immune given greater end-market diversification. However, this proved to not be the case following disappointing guidance for the third quarter, with revenue expected to fall 8% sequentially, well below PitchBook consensus. The weaker-than-expected guidance is exacerbated by channel destocking at European distributors, which saw elevated inventories (particularly for batteries) and are looking to reduce overall inventory levels following recent market movements. The company noted elevated inventories across its two main geographies, Europe and the United States, and expects Europe to correct by year-end, while U.S. excess inventories will likely last into 2024 given subdued demand.
We reduce our 2025 revenue forecast by approximately 10% while lowering gross margin expectations to 30.5% versus 32.5% previously. The main driver of our reduced revenue is a steeper decline in average selling prices for solar inverters, driven largely by increasing commercial shipment mix. The increasing commercial mix also drives a reduction in our gross margin expectations, since these volumes typically see lower gross margins. We expect SolarEdge’s business to continue to trend toward lower-margin businesses (namely commercial, batteries), which leads us to assume lower gross margins looking forward than the firm has generated historically.
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