Description

"How does a stock go down 90%? It goes down 80% and then another 50%."

Short SEDG, $10 TP, 70% downside

Solaredge is a solar inverter company, primarily focused on the European and NA residential and small-scale commercial (i.e. factories and stores) rooftop solar market. Solar inverters convert DC power from solar panels to AC power for your household. SEDG has already fallen by 80% in a year, but increasing competition and a deeply unprofitable cost structure will only accelerate the doom loop, driving the stock downward.

Death From Above: ENPH

SEDG was one of the first rooftop solar inverter companies and was previously dominant in both NA and the EU, but has moved from ~ 50+% of the rooftop NA mkt in 2019 to <30% by now. This is as a result of competition from ENPH which makes microinverters. Microinverters are mounted directly on each solar panel and convert the electrical current at the source of creation, whereas a string inverter (what most of the world uses, and what SEDG supplies) is mounted on your house and converts the electrical currents from all the solar panels in one central location. Microinverters are much smaller and easier to install (hence the name micro). At the same time, they have much lower failure rates (ENPH and checks suggest <0.05% failure rate vs >2% for SEDG) and longer warranties (25 vs 12 years)

ENPH has begun expanding to the EU and internationally as of last year, where SEDG has previously been more dominant, and commentary has suggested that it has already overtaken SEDG in traditionally SEDG-favored markets like France, as a result of its ease of install. Conversations with installers suggest that although ENPH can be more expensive than SEDG on a per unit basis (0.34/Watt vs 0.21/watt), inverter costs only make up <10-15% of the total installation cost of solar, with labor being up to 50% of the total cost. Hence, ENPH’s microinverters may result in 5-7% higher equipment costs, but can cut overall install time and labor by >20%, resulting in net savings as a whole, even before accounting for the much lower failure rate.

ENPH is planning to rollout its new GaN inverters next year. GaN-based devices, as a result of lower gate and output charges compared to Si devices, reduces the overall BoM by increasing efficiency, reducing heat and thus device weight and cost. As a result, ENPH thinks that they can get pricing down to the low 20 cents/watt, compared to the mid-30s cents per watt cost for their current microinverters. This would wipe out SEDG’s pricing advantage, resulting in further market share losses.

Death from below: TSLA and Chinese inverters

At the same time, cost competition is coming from the low end. SEDG has historically been favored as a TSLA Powerwall partner in NA and as a cheaper lower cost option to ENPH in the EU. But TSLA’s new generation powerwall features an integrated inverter, thus wiping out the reason to use SEDG’s. With TSLA making up 45+% of the NA residential battery storage market and ENPH making up another 30%, there is limited room for SEDG to be paired in a market where storage is becoming increasingly paired with rooftop solar installations (forecasts have battery penetration doubling as a % of total rooftop solar sales). Moreover, EU solar is also becoming increasingly penetrated by Chinese solar inverter companies like hoymiles and growatt that price at ~ 0.15/watt, well below SEDG.

 TSLA’s ability to internalize low priced components to help sell high -value products(batteries) and the Chinese inverters’ superior cost structure (SEDG relies on contract manufacturers in higher cost locations like the EU in contrast) will allow them to continue pricing at these levels.

These companies have all committed towards continued EU penetration, and with limited technical differences between their products and SEDG, expect further pricing pressure and market share losses.

Dancing with death: SEDG

Given the rapid falloff in solar installations in the past year + increased competition, SEDG has already been cutting prices and volumes to the point of unprofitability. This past quarter, SEDG has ~ 200m of revenue, 230m of COGs, and ~ 150m of Opex, meaning that they had a negative 85% operating margin.

Management claims that they will be able to recover to a revenue runrate of ~ 500m+ (estimated sell through), with ~ 30% gross margins (So 150m) of gross profit, but that seems unlikely in the next 6 months. Even if they did, current opex of ~ 150m means that even in their best case, SEDG would be at negative GAAP profitability (SEDG reports adjusted numbers, but the gap between GAAP and adjusted earnings is largely SBC, which is a real cost, no matter what management teams claim)

Right now,  SEDG has >6 months of inventory in the channel vs a 2-month historical average, meaning that SEDG will continue to be loss making for the next 6 months even in the absence of further price cuts and share losses as a result of channel destocking as distributors work down the excess.

Furthermore, SEDG continues to burn cash via working capital. Inventory has doubled YoY to ~1.5bn from a 700m baseline, which at the current runrate revenue is 2 years of inventory despite execs claiming that they want to generate FCF. Given the historically rapid product cycle of solar, there is significant risk of obsolescence.

In response to all this pressure, the CFO resigned at the start of June.

Summary:

Increasing competition from category-killing ENPH pricing down and low-cost Chinese competitors is pushing SEDG's market share and price down aggressively.

SEDG has ~ 600m of cash as of last quarter. With ~60m shares outstanding, the floor is $10/share. But With FCF and profitability already deeply negative, this could be a Chapter 11.

Catalyst

Earnings