The current year has been one of the most challenging years in decades for the energy sector. The result has been a deep correction in oil and gas stocks. However, the story is entirely different for the alternative energy sector. Quality stocks have performed and delivered stellar returns. SolarEdge Technologies (NASDAQ:SEDG) stock has been among the top performers. For Year-to-date fiscal year 2020, SEDG stock has surged by 188%.
At a forward price-to-earnings-ratio of 69.0, investors will be cautious on considering exposure to SEDG stock. However, there are two points to note. The stock has already corrected by 12% from 52-week highs of $309.8. Further, for a high growth company, the P/E ratio is not the best indicator of over-valuation.
To put things into perspective, the company’s revenue has grown at a CAGR of 35.4% in the last five year. For the next five years, analyst estimates point to annual earnings growth of 30%. This column will discuss the reasons to believe that this growth is achievable. Given this view, SEDG stock is worth accumulating around $250 levels.
Industry Tailwinds Will Support Growth
With global focus on cleaner energy, the alternative energy sector is positioned for multi-decade growth. Solar energy contributed to 4% of total renewable generation in FY2016. This is expected to increase to 17% by FY2030.
The International Energy Agency believes that solar PV will dominate the renewable energy capacity addition for the next five years. Specific to the United States, investors are bullish on the renewable energy theme after President-elect Joe Biden takes office.
SolarEdge Technologies is one of the leading solar inverter companies with presence in 28 countries. The industry growth outlook is a strong reason to believe that the company’s earnings growth will remain strong in the coming years.
Company Specific Growth Triggers
In the third quarter of 2020, the company’s business outside the United States touched a record high. Growth primarily came from Europe amidst the impact of the pandemic. I believe that expansion beyond the United States is a key growth trigger for the company. In the next five years, solar GW instillation growth in Europe and Asia Pacific is likely to outpace the United States. Therefore, the company has significant headroom for growth in new markets.
I also like SolarEdge Technologies from an innovation perspective. The company has 356 awarded patents and 318 pending applications. Innovation is likely to drive top-line growth. As an example, the company has smart energy solutions for households.
With the company’s smart electric vehicle charger, fast charging of electric vehicle from home is possible. In terms of growth, the global residential energy storage market is projected to reach $17.5 billion by FY2024. Therefore, the segment can be a key growth driver.
Additionally, the company’s recent partnership with Schneider Electric can also be a potential game changer in terms of growth. The “collaboration is intended to serve market needs of new homes and new homebuilders initially in California, where solar is now required on all new home constructions.”
This can be a global trend where solar will be made mandatory on all new home constructions. The market the company is currently serving is just the tip of the iceberg.
From a financial perspective, SolarEdge Technologies has ample headroom for investing in growth. As of Q3 2020, the company reported net cash position of $553.8 million. Also, the company reported operating cash flow of $195.4 million for year-to-date FY2020. This implies an annualized OCF of $260 million. I therefore don’t see any financial headwinds impacting the company’s growth.
Concluding Views On SEDG Stock
SolarEdge Technologies operates in an industry that has secular long-term tailwinds.
The company has been expanding outside the United States with target customers as business owners, home owners and PV professionals. I believe that Asia Pacific and Europe can ensure that strong growth momentum sustains for the company.
I would therefore advise accumulating SEDG stock on corrections with a medium to long-term time horizon.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.