SolarEdge Technologies Inc (NASDAQ: SEDG) announced another strong quarter last week, sending the stock higher as a result. Revenue jumped 22% from a year ago to $166.6 million, gross margin hit 34.9%, and net income came in at $31.5 million, or $0.61 per share.
There isn't a lot that's going wrong for SolarEdge Technologies at the moment. The company's end markets are growing, it's taking market share, and an expanding product line is helping broaden the revenue base. Here's what to know about this company and what to watch in the future.
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Product expansion continues
What SolarEdge has done brilliantly is leverage its position in the power optimizer market to expand into new markets. It started as a powerhouse in residential power optimizers and then pushed into inverters and now commercial solar markets.
Each product expansion can leverage the company's business model of selling directly to installers around the globe. Right now, the company is in an ideal position supplying installers with critical components for solar installations and doesn't seem to have much of the pricing pressure that has hurt the rest of the solar industry.
A hidden tailwind for SolarEdge
One risk SolarEdge faced only a year ago was a growing reliance on a small number of customers who were starting to manufacture their own solar components. The main example is SolarCity, who has since been acquired by Tesla (NASDAQ: TSLA).
SolarCity was developing its own solar manufacturing capacity and was beginning to develop full solar solutions, including energy storage, inverters, and charging. As the market leader in residential solar, SolarCity and Tesla could push SolarEdge's products out of its ecosystem, resulting in a massive lost opportunity.
But Tesla has shrunk SolarCity's operations since the buyout, which has worked in SolarEdge's favor. SolarEdge offers hardware and monitoring solutions to local and regional solar installers, who are the ones taking the market share Tesla is giving up. In other words, SolarEdge is filling the market Tesla is leaving behind, which is driving growth in the U.S.
What to watch for
What SolarEdge could run into is solar panel manufacturers looking to vertically integrate. They'll want to include micro-inverters or power optimizers at the module level, built at their manufacturing plants. SunPower (NASDAQ: SPWR) has done this with its Equinox home solar systems and others have toyed with the idea. But this is a threat that hasn't materialized yet.
Interestingly, SolarEdge can combat some of that replacement risk by partnering with manufacturers itself. Canadian Solar (NASDAQ: CSIQ) has a solar panel called SmartDC, which includes SolarEdge power optimizers in the cell.
Management has also warned that low-cost Asian competitors could eventually come after market share. Again, that hasn't materialized yet but could be an issue in the future. Gross margins in the mid-30s are rare in the solar industry and SolarEdge is now capturing most of the value in small solar installations, a position that may not last.
SolarEdge's lead is real, but may not last
It's clear that SolarEdge has an enviable position in the solar market as a critical component that residential and commercial installers rely on. What's less clear is whether or not that current advantage is durable if panel manufacturers move downstream or if low-cost suppliers enter the market.
For now, the tailwinds are building behind SolarEdge Technologies and that's going to drive the stock forward for the foreseeable future.
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