SolarEdge: I'm Dumping This Stock Amid Severe Profitability Woes

Yahoo

16-05-2025

SolarEdge (NASDAQ:SEDG) stock has experienced negative market trends lately. The stock performed worse than the broader market index since it declined by nearly 80% in value during the last 52 weeks. The current position below 50-day moving average levels indicates investors have lost their interest in this solar company. Numerous serious problems have made investors understand that the business faces significant threats.
Warning! GuruFocus has detected 6 Warning Signs with SEDG.
Fundamental performance remains the main focus of SolarEdge investors since the company experienced a significant net income drop to $1.8 billion while its last-year revenue fell by 70%. The business confronts multiple challenges in asset control while facing hard market conditions.
Moreover, the upcoming tariffs for this Israeli solar business are a major concern because they will drive up supply chain expenses, which threatens operational success.
Even though this year the company formed partnerships with Summit Ridge Energy alongside entering safe harbor agreements I believe these developments will not prevent the ongoing decline from worsening.
My negative forecast for this stock stems from the pessimistic outlook surrounding its fundamental performance which causes the current unusually low sector multiples.
During his second presidential term, Donald Trump deployed several new policies containing energy-related measures under the banner of his America First trade principles to promote domestic manufacturing. The heavy 145% China tariff issue has investors alarmed since the American solar industry uses numerous Chinese components, and supply chain price increases directly impact total solar expenses. These increased import tariffs will raise the prices of these products, although they will create better competitive circumstances for home-based manufacturers. Non-U.S. manufacturers, including SolarEdge, will encounter substantial trade obstacles.
The domestic industry will see positive effects from this tariff implementation because it does not obtain its parts from outside suppliers. Tariffs on imported goods will boost their prices, which will establish domestic production as a competitive alternative for U.S. manufacturers. The new tariffs against imported solar products will generate substantial business challenges for SolarEdge since it is an Israeli company.
As SolarEdge operates in Israel, its investors need to understand that the company does not qualify for U.S. domestic protection. The bilateral relationship between Israel and the United States made Prime Minister Netanyahu present President Trump with a promise to raise import tariffs imposed on Israeli goods on "Liberation Day." Despite the temporary suspension of these tariffs from the Trump administration, there has been no permanent elimination.
If the tariffs are imposed after 90 days, SolarEdge can face multiple challenges from these measures. The cost of solar inverters and power optimizers components will increase, raising the overall prices of products. Plus, the demand for solar panels will decrease. As the U.S. holds the majority market share of the company, this will definitely affect sales. Moreover, if tariffs keep pushing up the cost of solar panels and disrupt supply chains, companies like SolarEdge could face tighter profit margins and a more challenging market in 2025.
SolarEdge looks in deep trouble when it comes to its financials. In Q4 2024, the company reported a 46% decline in sales, reaching $170 million.
SolarEdge is also losing money on its core business. In Q4, its gross margins were still negative. On a GAAP basis, margins improved to a loss of 57.2%, up from a terrible loss of 309% the previous quarter. These numbers show better cost control, but the company still isn't making money on its main operations.
Although there is a little hope as the company is improving its margin, still, the top-line decline is raising serious issues for the company. For the full year of 2024, the company reported a 70% drop in revenue, along with a net loss of $1.8 billion from a positive $34 million in the prior year. I believe the reason behind this huge decline is the aggressive price cuts and discount promotions. These measures were taken by the company to tackle weak demand and strong competition from low-cost rivals. But it seems like despite getting any benefits from these initiatives, it hurts the company badly.
Further, the company's finances came under pressure due to big losses from asset impairments and write-downs totaling approximately $1.17 billion over the full year. Although U.S market prices have improved a little, they are not enough to make up for the tough overall market conditions. That's why we have seen the company's profitability hardly being hurt. In 2023, strong sales and better cost control helped the company stay profitable. But in 2024, a big drop in revenue, higher costs, and large write-downs led to a loss.
There is one positive side of SolarEdge when it comes to operating cash flow. The fourth quarter Cash Operating Flow was $12.3 million. This is the inflection point because Q3 ended with spending $63.9 million on operating cash and nothing else. After the extremely negative $136.7 million of the previous years, the free cash flow came in positive territory at $26 million. Additionally, the company had $81.8 million in an increased cash balance at the end of September 2024 compared to $51.6 million at the end of Q4. This structured cash flow allows for the future projects and operations to be taken on.
However, SolarEdge is still burning significant cash. In 2024 alone, the company had $421.5 million in free cash flow deficit, and I think this burn will continue in 2025, which means that SolarEdge is going to have no top-line growth in 2025. Therefore, if a firm has around $630 million in cash and the free cash flow is negative $400 million per year, that is, the firm will be out of cash in roughly 18 months. SolarEdge will need to raise capital in order to avoid being out of cash.
On the business operations side, in the fourth quarter of 2024, the company shipped 895 MW (AC) of inverters and 130 MWh of batteries, and for the full year, total shipments were 3,563 MW (AC) of inverters and 576 MWh of batteries. This is, of course, despite the financial challenges, but the shipment volumes show that SolarEdge is still fairly active in its core business.
Furthermore, SolarEdge is updating how it does business and reports its finances. After changing a customer contract, it has also revised how it says it makes revenue and loans in the third quarter of 2024 and has plans to shut down its energy storage business in Korea.
Even though the last few months have been tough, CEO Shuki Nir said that the company is on the right path. SolarEdge showed positive free cash flow in the fourth quarter, which he thinks is a good first step to recovery. The company's management anticipates remaining free cash flow positive in the first quarter of 2025 and so on.
As we look at future numbers, SolarEdge is also predicting revenue in Q1 2025 to be anywhere between $195 million and $215 million. Further, they are expecting their non-GAAP gross margin to improve into a range of 6% to 10%, and that non-GAAP operating expenses will be kept contained in a range of $98 million to $103 million.
Although the company still has a long way to go, it looks to have taken positive steps toward recovery. However, I believe the Q1 this year will give a clear indication of where the company is heading.
In terms of valuation, it looks attractive if we look at price-to-sales metrics. It is currently trading at forward P/S 0.68, which is a 70% discount from the sector median of 2.31x further, if we look at its historical 5-year average of 4,65x, which gives an 83% discount from current metrics.
The GuruFocus GF value indicator also shows that the stock is trading much below its intrinsic value of $43, which reflects a 258% upside potential from its current price of $12.7 per share.
The deep discount also implies market participants are overly gloomy about the company's near-term performance as revenues fall, write-downs mount, and its operations turn dicey. However, a re-rating opportunity looms after the company executes its opportunity to narrow its margins, cut excess inventory, and return to positive free cash flow. If that happens, the current low valuation will be substantial. On the surface, the near-term financial numbers are weak, but the very strong P/S value suggests the stock is trading at a very cheap multiple relative to historical levels and the industry peers, setting up the opportunity to be a long-term value play for those contrarian investors who believe in its eventual recovery.
While looking at technical aspects, we see that the stock price of SolarEdge Technologies currently stands at $13.47 while following a sustained downward trend, which forms a sequence of lower highs and lower lows. Current short-term bearish pressure exists because the stock price stays below the 9-day EMA at $14.01. A major support zone exists between $13.00 and $13.20, and the first resistance level is at the 9-day EMA, as well as the stronger barrier at $15.40 to $15.50, which might be the 50-day or 200-day EMA.
The slope of the long-term trendline confirms the bearish condition for the medium-range price outlook. The current momentum level shows declining strength since the RSI indicator stays below fifty. Any short-lived bear market relief will likely occur after RSI reaches 30, but the stock needs to surpass its 9-day EMA to avoid capped price movement. The market activity shows restrained selling patterns which match the moderate trading volume levels.
Overall, the technical analysis shows that the market has started to move down because of its resistance to move higher. New bullish trends need bulls to establish defender status at $13 support while advancing above $14 to start a shift. A violation of the $13 support would likely push prices to test $12.50.
Having discussed all the negative aspects of the company, I admit to saying that the company recently has achieved some developments that can turn the tables for the company. Firstly, the company made a strategic partnership with Summit Ridge Energy (SRE), a leading commercial solar company, to supply SolarEdge's inverters and power optimizers, which are domestically manufactured in Tampa, Florida.
Through this partnership, SolarEdge will help SRE standardize its rooftop solar installations by providing its inverter solutions. These projects are expected to surpass 100MW in capacity, with SRE projecting ongoing growth as its development pipeline grows. The first shipments from Florida are set to start in April 2025.
Second, major U.S. residential solar installers and financiers, including Sunrun (NASDAQ:RUN), have signed safe harbor agreements with SolarEdge to use domestically made inverters, power optimizers, and batteries to aid partners in receiving bonus tax credits. It also made its second 45X Advanced Manufacturing Production Tax Credits sale. Strong U.S. solar market forecasts combined with a 4% CAGR residential rate make SolarEdge a strong competitor against foreign competition.
For SolarEdge, the partnership safeguards a domestic market for its inverter, Power Optimizers, and batteries that will be manufactured in the U.S. This also allows its partners to secure bonus tax credits, making project economics and planning clarity stronger. As a result, SolarEdge can receive predictable revenue streams, have more favorable cash flow, and have more favorable positioning relative to foreign competitors, all useful to the development of the company's financial stability.
At the current stage, investing in SolarEdge is a bit risky because of serious underlying issues, including sharp revenue declines, Net losses, supply chain disruptions, and new tariffs. The technicals also don't look good, with the price staying below key moving averages and the RSI under 50, showing weak momentum.
While recent deals like the safe harbor agreements a nd tax credit sales give some hope, they aren't strong enough on their own to spark a full recovery. The company's support zone is between $13.00 and $13.20, but if the stock breaks below it, it could quickly slide to $12.50 or lower.
SolarEdge might benefit in the long run from U.S. solar market growth and its domestic production strategy. But right now, the fundamentals haven't improved enough, and there's no clear catalyst to drive the stock higher. The market may be overly negative at this stage, but without a solid reason to buy, the risks outweigh the rewards.
In short, I remain cautious and bearish on SolarEdge in the near term.
This article first appeared on GuruFocus.