SolarEdge casts another cloud over industry, but bulls aren't fretting amid stock's plunge

By Emily Bary

One bullish analyst says he underestimated U.S. weakness but still likes the stock as a way to play the solar trend

Another solar company has warned of demand challenges, and that's dragging down shares of industry players Wednesday.

Executives at SolarEdge Technologies Inc. (SEDG) became the latest to caution about market trends Tuesday afternoon, delivering a forecast that fell well shy of expectations and highlighting negative trends in the U.S. market. SolarEdge joined SunPower Corp. (SPWR) and Enphase Energy Inc. (ENPH), which have given similar indications in recent sessions.

"The combination of higher interest rates and the new net metering 3.0 regime in California has led to a decrease in demand compared to the second half of last year," SolarEdge Chief Executive Zvi Lando said on the company's earnings call. "As a result, inventories of our product in the various channels are higher than normal, as they were built in anticipation of substantial market growth that did not materialize."

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SolarEdge saw a 29% decline in shipments to U.S. residential markets during its second quarter, though sell-through by distributors increased by more than 10%. Lando said he expected "the process of inventory normalization to last at least through the end of the year."

In Europe, trends were mixed. Megawatt shipments were up 52% on a sequential basis, but distributors are also dealing with elevated inventories.

"As growth in demand has tapered off, distributors are taking a more cautious approach in order to better manage their cash flow," Lando said. "In addition to taking actions to reduce inventory levels, distributors are also reducing the number of suppliers in their portfolio, which had expanded during the period of shortages."

Shares were tumbling 18% as of Wednesday's midday trading and on track to log their largest single-day percentage decline in essentially a year, according to Dow Jones Market Data, having logged a 19.1% drop Aug. 3, 2022.

Enphase's stock was off 6% Wednesday, while SunPower's was down 9.6%. First Solar Inc.'s (FSLR) stock was down 5.2%.

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Joseph Osha, a Guggenheim analyst who's bullish on the stock, admitted that he "underestimated the impact that U.S. weakness is having on the company's business, and to a lesser extent, there are more problems in Europe than we expected as well."

Still, he said in a Wednesday report that SolarEdge "is the best way to participate in distributed solar growth," as the company could see revenue growth upwards of 20% this year and revenue growth at a low-teens rate next year, despite the headwinds.

He rates the stock a buy but cut his price target to $290 from $400.

JPMorgan's Mark Strouse also remained upbeat. SolarEdge "is one of the few solar stocks that is consistently profitable, generates cash, and has a solid balance sheet," he wrote. "We believe further penetration of the global solar market and expansion into new verticals should allow the stock to outperform our solar coverage."

That said, he acknowledged shares "may be somewhat range-bound until visibility improves," and he cut his price target to $335 from $359 while reiterating an overweight rating.

BMO Capital Markets analyst Ameet Thakkar wrote that while he had expected SolarEdge's mix of Europe and commercial and industrial sales to give the company a bit of a cushion, the company's $880 million to $920 million revenue forecast for the third quarter still trailed his estimate by 17%.

"We stay at Outperform as we believe [SolarEdge] should rebound faster than other rooftop leveraged peers," he wrote, though he slashed his price target to $285 from $368.

-Emily Bary

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08-02-23 1311ET

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