SolarEdge Is Well Insulated Against a U.S. Residential Solar Slowdown

We maintain our $266 fair value estimate for SolarEdge following its fourth-quarter earnings. We view SolarEdge shares as slightly overvalued at current levels.

SolarEdge’s reported fourth-quarter revenue near the top end of its guidance range, while gross margins for the solar segment (32.4%) surpassed guidance of 28%-31%. We view fourth-quarter results, combined with the company’s first-quarter outlook, as supportive of management’s prior comments that margins should recover to 30%-32% from mid-2023 forward following weak 2022 margin performance.

SolarEdge 2022 results were highlighted by robust growth from Europe, with revenue increasing 89% year on year. SolarEdge’s Europe exposure (60% of revenue) positions it well to navigate what could be a slowdown in U.S. residential solar demand in 2023 as California NEM 3.0 takes effect. Management noted the largest restraint on European sales is manufacturing capacity, with demand outstripping supply.

2022 marked the first full year of SolarEdge’s residential battery product. The company shipped 889 megawatt hours in 2022, with some weakness sequentially on lower European shipments. We estimate gross margins are in the range of 20% currently, with the company expecting to end the year around its long-term target of 25% as its Sella 2 factory ramps. We expect batteries to continue to increase as a percentage of SolarEdge’s revenue long term.

Beyond its traditional solar and storage activities, SolarEdge recorded an approximate $100 million impairment associated with its e-Mobility business unit. Our valuation had already ascribed little value to this segment. As it relates to new products, we continue to monitor the company’s utility-scale solar inverter product. Product launch appears delayed until later this year with potential first revenue contribution in 2024. We are cautious on long-term success in this segment given the commoditized nature of products.