When any stock starts selling for 10 times its revenue, it’s in bubble territory.
Such valuations can be justified, if the company is growing fast, and if it’s doing so profitably. But even cloud stocks eventually settle down to Earth, either because they justify the faith with growth. or fail and fall.
With 2020’s gain of 225% (so far), SolarEdge Technologies (NASDAQ:SEDG) has entered bubble territory. It traded on Dec. 17 with a market cap of $15.8 billion. Revenue for the year is expected to be $1.5 billion.
SolarEdge makes inverters, along with related parts and software. These turn the DC power created by solar panels into the AC power used on the electric grid. No matter who makes the panels, these are essential in making power useful.
With solar panels now delivering power for less than $1/watt, analysts are expecting a boom. New technologies will drive the price down further. The need to fight climate change will overcome oil objections. A thumb will come down on oil prices, and the energy revolution will truly begin.
All those panels, meanwhile, will need inverters. The realization of this simple fact has Wall Street treating SolarEdge and its rival, Enphase Energy (NASDAQ:ENPH), like it did with oil stocks in 2012.
The Edge for SEDG Stock
When SolarEdge announced September quarter net income of $43.7 million, $1.21 per share, on Nov. 2, it beat analyst profit expectations. But these same analysts then looked at the revenue number, $338 million. They multiplied it by four, shouted “where’s the growth?” The stock fell, hard, from $262 per share to about $213.
It got down, but it’s up again, because of articles like this, which define its products as Module Level Power Electronics (MLPE) . SolarEdge shares 80% of the residential MLPE market with Enphase.
The “Unique Selling Proposition” for SolarEdge is intelligence. Its inverters are “power management systems” that maximize the power produced by each panel. It tells homeowners you can “run your car on sunshine.” It offers cloud-based software to electric utilities so they will take residential power instead of shunning it, as they did a few years ago.
On Dec. 17 shares were trading at $313. This justified the faith of my fellow InvestorPlace contributor Luke Lango, who called SolarEdge “a long-term winner” in November. The Biden Administration’s promises to boost solar energy have given stocks like SolarEdge new life.
Profit in the Panel
Residential solar is cool, but it’s in bigger, utility-scale products where you’ll find the most profit. SolarEdge is active in this market but it’s not simple.
Inverters are now being installed by panel makers. Most panels are made in China. Tariffs can keep these products out of the U.S., but that doesn’t work in international markets.
It’s these risks that have our Chris Markoch calling SolarEdge overvalued at its present price. The company’s 2020 revenue will still be lower than 2019. The shares are vulnerable to a pullback. He prefers investors buy an ETF like the Invesco Solar ETF (NYSEARCA:TAN).
The Bottom Line
I have been pushing solar energy for a decade. It’s featured on the main page of my personal blog.
There are many ways to make money here. But the business is prone to fads. Is it about residential or utility scale projects? Which panel technology is best? Where should it be made to make the most money? Do you go with the manufacturer or the installer? Is the money in the panel or in selling the power?
The current vogue for the inverter stocks is just the latest fashion. Fashions change. You can speculate on SolarEdge, which has done better than the underlying market this year. Or you can invest in the underlying market.
I am with Chris on this one. Exchange-traded funds like TAN or iShares’ Global Clean Energy ETF (NYSEARCA:ICLN) are the way to go.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
