SolarEdge Technologies (SEDG -1.87%) stock slumped after it reported its third quarter results this month. Not only did the company's revenue fell 18% year-over-year, but it also provided a weak outlook for Q4. The big question is -- Does the results reflect a deterioration in the company's longer-term prospects, or was the sell-off due to some profit booking in a stock that is still up 144% year-to-date?
COVID-19 hits revenues
SolarEdge's 18% year-over-year fall in Q3 revenues is in stark contrast with an average growth of 45% that the company has delivered since its listing in 2015. The solar inverter and optimizer manufacturer's revenue for the quarter got impacted by slower than expected recovery in commercial installations. Solar installations, particularly in the commercial segment, got stalled due to COVID-19. Though the pace isn't certain, SolarEdge expects commercial installations to recover significantly in 2021, contributed by its new series of optimizers which are more cost effective.
Image source: Getty Images.
In comparison, residential products sales were relatively resilient. The company's revenue grew 2% sequentially, in-line with its guidance.
SolarEdge expects commercial sales to remain weak in Q4 as well. Overall, the company expects a 15% year-over-year fall, though a 5% sequential growth, in sales in Q4. Gross margins are expected to be within 32% to 34% range, in-line with Q3.
It is noteworthy that the fall in SolarEdge's revenues during the quarter was due to COVID-related impacts, and not likely due to a fall in the company's market share. The company is confident of maintaining, or improving, its share in 2021.
Growth avenues
In addition to inverters and optimizers, a key growth avenue for SolarEdge in the long-term would be energy storage products. The company announced a delay of few months in the release of its residential battery. The batteries are now expected to start contributing to the company's revenues from the second quarter of 2021. That could have been one of the factors that contributed to the stock's fall after it reported results.
The delay in the battery's release is due to COVID-related travel restrictions. Revenues from the battery were anyways expected to be nominal in 2020 and a few months' delay shouldn't be a major concern.
Another key growth avenue for SolarEdge in the long-term is solutions for the high-growth electric vehicles market. The company's powertrain units for light goods vehicles, light commercial vehicles, and e-motorcycles are currently in the testing and qualification stage.
Growing competition
SolarEdge looks well-placed to grow considering the positive outlook for solar energy as well as the company's leading position in the photovoltaic inverters and optimizers segment. However, it faces increased competition from other suppliers with competitive offerings. This may strain the company's margins.
At the same time, changes in government policies and subsidies may significantly impact the demand for SolarEdge's products. SolarEdge needs to consistently deliver innovative offerings at competitive prices to maintain and grow its market share.
A great growth stock?
Considering the risks that SolarEdge faces, the high revenue and earnings growth that it enjoyed in the past cannot be taken as a given going forward. That's why, with a PE of around 69 times, the stock looks a bit pricey even after the latest fall.
Even so, SolarEdge offers promising growth prospects. Third-quarter performance doesn't alter its long-term growth trajectory. Further, even without a win in the Senate, Joe Biden's election should be bullish for solar stocks. SolarEdge's fall offers an entry point for long-term investors. Given its weak outlook for the fourth quarter, the stock may see more volatility in the near-term. That may provide additional attractive entry points. Buying on the dips could be a great way to build a position in the stock.
