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SolarEdge (SEDG): A Great Play on Solar Energy

By August 15, 2020 No Comments

Eighteen months ago, we decided to install solar panels on our investment property in Florida.

The main incentive for this decision was to reduce the high monthly electricity bills we used to pay. Renters do not particularly care about saving energy when it’s the owner’s responsibility. Vacationers have a tendency to leave doors open while the AC is on and in winter they want the pool to be very warm 24/7.

Now thanks to our solar panels, our utilities bills have come down dramatically. All we pay to Florida Power & Light is a nominal fee for the privilege of being connected to the grid. In Florida, the utility companies do not buy back excess electricity produced by solar panels installed on houses’ roofs. Instead, there is an exchange mechanism. Any energy produced in excess of what the house draws is sent to the grid. When the sun is not shining, some of it is returned to the house as needed.

Our system in Florida uses SolarEdge (SEDG) inverters. An online SolarEdge dashboard allows us to monitor the energy used/saved by the hour. Today, for example, the dashboard tells me the solar energy produced so far this month is 717kWh.The lifetime energy produced since we installed it is 23.3 MWh. The CO2 saved is 35,888 lb, equivalent to 271 trees planted. We are not Green zealots, but it is cool to know we too are good people!

The bottom line is that it all works very well. We no longer have to worry about heating the pool or spending needless money on blowing cold air to cool off the beach. Including now-expired federal subsidies, we will recover our investment in solar panels supposed to last 40 years in less than 8 years. Other SolarEdge customers seem to be as satisfied as we are: the stock has quadrupled over the last 18 months.

Last quarter, this Israeli company again announced very solid numbers. Revenues for the last three months totaled $331.85 million, slightly better than a year ago and 3% above consensus estimates. Even more impressive, considering the pandemic, was the 40% earnings surprise, $0.97 per share vs. $0.69 expected.

SolarEdge (SEDG) sold 3.5 million power optimizers and 142,000 inverters. Inverters convert direct current (DC) energy produced by the solar panels into alternative current (AC) used in the house. Optimizers “condition” DC and send it to a central inverter that finishes the conversion process. Incidentally, SEDG bought a Korean battery maker, Kokam, with the goal to store this energy. Kokam is already increasing its production capacity by a factor of 10.

The company has realistic prospects for strong future growth. The business is already growing again nicely in Europe, Australia, Israel and Taiwan. It is furthermore showing signs of recovery in the US after the initial shock to sales caused by COVID 19.

The US market accounts for between 40 and 50% of total revenues, but a non-disclosed higher portion of earnings. Overall, management tells investors that margins in the US are roughly 400 basis points higher than in Europe and the rest of the world. This is due mainly because of tougher competition from Chines – and European – companies outside of the US.

I believe Chinese pressure in Europe will abate now that the Old Continent is finally waking up to the commercial and political threat. It would not be surprising to see Europe impose tariffs similar to those already implemented by the Trump administration. Tension between the two superpowers have also lead SolarEdge to move production out of China and to Vietnam, Hungary and Israel. Two thirds of SEDG’s production is already in those “non-tariff” countries. Management “believes” that that percentage will continue to increase.

SEDG’s product cycle looks promising as well with the recent launch of energy hubs and storage inverters in the US and the three-phase commercial inverter in Europe. SolarEdge is also planning the launch of a residential battery before year end. Finally, SEDG inverters were recently certified for use in Japan, thus opening a whole new market.

As of 8/13 MOPPX has 2.87% of the fund invested in SEDG.