Why SolarEdge Stock Is Cheap and Could Double

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SolarEdge Technologies Looks Like a Bargain

The solar industry is alive and growing, despite the rhetoric from President Donald Trump and his continued belief that climate change may not be due to humans.

The United States exited the Paris Agreement on climate change, placed major tariffs on imported solar panels, and is looking to cut credits to green projects.

But I doubt that Trump will want to wreak havoc with the alternative energy space, given the hundreds of thousands of good-paying jobs at stake.

The solar sector has undergone a renaissance, reducing debt and restructuring operations to produce a more streamlined and efficient operating model.

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A small-cap solar play that offers investors a great risk-to-reward trade is SolarEdge Technologies Inc (NASDAQ:SEDG).

SEDG stock is down 45% from its 52-week high in May 2018, despite strong growth in revenue, earnings, and free cash flow (FCF).

Chart courtesy of StockCharts.com

SolarEdge stock is trading in a sideways base after the sell-off, but it appears to have found some support. Look for a rally back to the previous trading range above $45.00.

What makes SolarEdge intriguing is that the company doesn’t manufacture solar panels, but instead focuses on providing integrated solutions that convert and optimize solar energy to alternating current (AC) power. The company also offers monitoring and storage solutions.

SolarEdge sells to residential, commercial, and small utilities in over 100 countries.

My Bullish Thesis on SEDG Stock

As I said earlier, SolarEdge is growing its key fundamental metrics to the point where the potential is not currently  accounted for in the share price.

The revenue picture for the company shows sequential growth in four straight years, with revenue surging from $79.1 million in 2013 to $607.1 million in 2017. The compound annual growth rate (CAGR) during this time was an impressive 66.5%.

Fiscal Year Revenue (Millions) Growth
2013 $79.0
2014 $133.2 68.6%
2015 $325.1 144%
2016 $480.0 47.7%
2017 $607.0 26.5%

(Source: “SolarEdge Technologies Inc.,” MarketWatch, last accessed November 9, 2018.)

For 2018, SolarEdge is estimated to produce revenue growth of 52.1% to $923.3 million, followed by growth of 16.2% to $1.1 billion. (Source: “SolarEdge Technologies, Inc. (SEDG),” Yahoo! Finance, last accessed November 9, 2018.)

The decline in the revenue growth rate is not a major concern for SEDG stock at this point, since this is what I would expect when the revenue base is undergoing strong growth.

SolarEdge has managed to expand its gross margins in four consecutive years, which indicates cost control.

Fiscal Year Gross Margins
2014 16.4%
2015 25.2%
2016 31.0%
2017 35.4%

(Source: MarketWatch, op cit.)

Furthermore, the company has increased its earnings before interest, tax, depreciation, and amortization (EBITDA) in four straight years, producing positive EBITDA from 2015 to 2017.

Fiscal Year EBITDA (Millions) Growth
2013 -$24.6
2014 -$15.28 38%
2015 $31.0 303%
2016 $72.6 134%
2017 $99.3 37%

(Source: Ibid.)

SolarEdge’s generally accepted accounting principles (GAAP) diluted earnings per share (EPS) is positive. It increased in four straight years, including $1.85 per diluted share in 2017 and $2.43 on an adjusted basis.

Fiscal Year GAAP Diluted EPS Growth
2013 -$0.72
2014 -$0.55 24.1%
2015 $0.27 149.4%
2016 $1.16 329.6%
2017 $1.85 59.5%

(Source: Ibid.)

SolarEdge is expected to ramp up its adjusted earnings by 33% to $3.24 per diluted share in 2018, followed by some softening to $3.21 per diluted share in 2019. (Source: Yahoo! Finance, op cit.)

Another positive sign is the lack of any debt for SolarEdge, which is impressive. The company holds almost $350.0 million in cash. (Source: Ibid.)

SolarEdge has also been generating positive FCF, with growth in four straight years.

Fiscal Year Free Cash Flow (Millions) Growth
2013 -$24.7
2014 -$20.8 15.5%
2015 $0.3 101.4%
2016 $38.1 13,074%
2017 $115.3 202.8%

(Source: MarketWatch, op cit.)

Analyst Take

In my view, the fundamentals and growth are not currently reflected in the price of SolarEdge stock.

The irony is the rather large short position of almost 10.0 million shares, or 23.7% of the float. I think the short sellers are wrong about this stock and that a rally will drive short-covering support.

SolarEdge trades at an attractive 12.8 times its 2019 consensus EPS. The price/earnings to growth (PEG) ratio of 0.58 is extremely cheap and indicates that SEDG stock trades well below its estimated compound annual growth rate (CAGR) for earnings. Account for the free cash flow and the PEG is even more attractive.