SolarEdge Earnings: End Market Diversification Drives Robust Results

We raise our fair value estimate for no-moat SolarEdge SEDG to $277 per share from $266 following first-quarter results. The improved valuation is a result of an increase in our long-term gross margin forecast for the company’s solar segment. We expect SolarEdge shares to react positively to the results and outlook, but we view shares as fairly valued.

SolarEdge’s results and second-quarter outlook underscore its much broader end-market diversification in comparison with peer Enphase. SolarEdge’s strong results and outlook were driven by particular strength in European and commercial end market demand, two segments where Enphase has much lower exposure. As expected, SolarEdge reported subdued results in the U.S. residential segment as higher interest rates and California’s NEM 3.0 regulatory change weigh on market demand in 2023.

Among the most notable highlights from the report were robust margins, which caused us to raise our long-term gross margin forecast. The company reported Solar segment gross margins of 35% in the first quarter and guided to 34%-37% in the second quarter. Our revised forecast still implies lower than this over the long term (32%-33%) as we expect mix shifts over time to bring margins more in line with our long-term targets. In particular, the growing mix of commercial solar and battery storage, both of which carry lower gross margins than residential inverters, drives our more conservative thinking.

SolarEdge plans to begin manufacturing inverters in the U.S. later this year following incentives in the Inflation Reduction Act. The company plans to utilize a combination of contract manufacturing and company-owned facilities with initial production beginning in the second half of this year. In addition, SolarEdge continues startup activities with its Sella 2 battery factory, with plans to achieve the full 1.7 gigawatt-hour capacity by the beginning of 2024.