SolarEdge IPO Provides Cheaper Solar Power and Worthwhile Investment

March 26, 2015 • Analysis • Tags: , ,

It has become quite apparent that the world is hungry for cheaper, cleaner and more sustainable sources of energy. Just last week, France passed a new law requiring rooftops on all buildings in commercial zones to be covered with either solar panels or plants. China, recognizing the potentially perilous effects of their oil consumption, has become the world leader in annual renewable energy investments. SolarEdge Technologies IPO comes at a most opportune time. The Herzylia Israel-based firm, which provides DC-optimized inverters for the solar market, is looking to raise $119 million through the issuance of 7 million shares priced $18 equating to a $648 million valuation. The technology company plans to list on the NASDAQ under the symbol SEDG.

Company Background

SolarEdge manufactures and markets DC (Direct Current) optimized inverter systems for solar PV installations (Photovoltaic). These packaged systems include power optimizers, inverters and a cloud based energy monitoring software (below). This “intelligent inverter” provides the customer increased power generation, lower energy costs and a higher level of safety and reliability.

The company states that their optimized inverter system will increase the efficiency of commercial and residential solar installments by 25% while having a lower cost per watt than the leading micro-inverter manufacturer.

SEDG primarily sells its product to large solar installers such as Vivint Solar Inc (VSLR) and the Tesla backed SolarCity (SCTY), and since commercialization, has shipped over 5.1 million inverters across 73 countries.

Industry Trends and Market Opportunity

It is estimated that the annual installed capacity of the global solar market will grow 72.2% from 34.6 GW in 2013 to 59.6 GW in 2017. The PV inverter installations in both the US and China are expected to remain popular with respective CAGRs of 19% and 11.3%.

sedg outlook

McKinsey believes the unsubsidized economic potential for distributed residential and commercial solar PV in the US will reach an inflection point in 2015-2016(above), “which will enable unsubsidized demand for solar PV to grow between 200 and 700 GW by 2020”. More specific to SolarEdge, an IHS report has found that the global micro-inverter shipments will quadruple to 2.1 GW by 2017.

These figures are very favorable for SEDG as they set off to grow their international presence and increase their foothold in the US market.

Impressive Top-line Growth

SEDG income statement

Based on their financial numbers, it is apparent that solar installers are catching on to benefits of SolarEdge’s inverter systems as they are selling like hot cakes. While year to year revenue growth was only just below 5% in 2013, it exploded to 68.5% in 2014 with total sales of $133.2 million (above). The positive trend continued with the company reporting revenues for the first six months FY2015 of $140.3 million, already surpassing last fiscal year’s total and representing a 180% increase from the same period a year ago.

SEDG shipments

These incredible numbers are echoed in the amount of inverters and power optimizers shipped, with the former growing 169% and the later 154% for the six months ended December 31 2013 compared to the same period in 2014(above).

SEDG was also able to improve their gross margin to 21% from 12% in the aforementioned periods resulting in the company finally reaching profitability in the first six months of the current fiscal year, with a net income of $5.9 million.

Potential Risk Factors

The reduction or elimination of government subsidies for on-grid solar energy could potentially lower demand for solar PV systems and significantly affect SolarEdge’s business. For example, post Euro economic crisis, many European government scaled back their solar PV incentives programs.

SolarEdge operates in a highly competitive market, and the company expects competition to intensify as existing rivals, such as SMA Solar (S92.de) Technology, Enphase Energy (ENPH) and ABB Ltd. (ABB), introduce power optimizer, inverter and monitoring system products which could eat away market share.

SolarCity, the largest solar power provider in the US and Krannich represent a combined 27% of SEDG’s total revenue (below). A loss of a major customer could have serious effects on their financial results.

SEDG sales

Conclusion

SolarEdge intends to use a large proportion of the proceeds to expand their business into additional marketplaces while continuing to penetrate existing markets. In addition, the firm plans to develop and launch new products and services in order to further differentiate themselves from competitors. They have increased their Sales and Marketing spending by almost 40% and R&D by 15% from 2013 to 2014 towards that end. Their relationship with giants SolarCity and Krannich will allow them to increase market share in the important US market which represented more than 50% of their FY 2014 revenues.

Enphase Energy (ENPH), SEDG’s closest competitor had similar sales ( $149.5 million vs. $140.3 million) and lower amounts of shipped inverters( 1.55 million vs. 5.1 million) at their IPO, yet its stock has returned more than 80% since going public. When taken together with SolarEdge’s impressive revenue growth, and sound business expansion strategy, we are encouraged with the company’s long-term prospects. Despite dropping oil prices, it is highly unlikely that demand for renewable and clean energy will go away.

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