SolarEdge Earnings: End Market Slowdown, Increasing Commoditization Drive Disappointing Outlook

We lower our fair value estimate for SolarEdge SEDG to $75 from $147 following the company’s third quarter results and updated outlook. Our reduced valuation is driven by lower long-term revenue and gross margin expectations, coupled with reduced operating leverage. Our no-moat and Very High Uncertainty ratings are unchanged. We view shares as fairly valued.

After pre-announcing weak third quarter results last week SolarEdge provided fourth quarter guidance and initial thoughts on 2024 that cause us to reduce our expectations materially. In short, results and guidance appear to confirm our and the market’s worst fears that the company is experiencing a sharp end market slowdown as well as increasing commoditization of its rooftop solar inverters.

The company expects fourth quarter revenue of $325 million (down over 50% from the third quarter) and gross margins of 7-10% (versus 24% in third quarter). The exceptionally weak fourth quarter guidance is driven by a sharp deterioration in European rooftop solar demand as burgeoning supply has met weakening demand, causing ballooning inventory levels at distributors.

While we view the fourth quarter guidance as disappointing it doesn’t directly impact our long-term outlook given the impact of excess inventories weighing disproportionately on near-term revenue. However, SolarEdge’s commentary on normalized revenue run rate based on underlying demand was also well below our expectations. The company expects normalized revenue to approximate $600-700 million per quarter based on recent underlying demand levels. This informs our medium-term thinking, which causes us to reduce 2025 revenue expectations by approximately 30%. While we had previously accounted for a slowdown in U.S. rooftop solar demand we extrapolated too high a growth rate for Europe, which comprises the majority of SolarEdge’s sales.