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Should You 'Buy the Dip' in SolarEdge Technologies?

With all eyes on the Solar industry as Joe Biden won the election, people are rushing to buy stocks of major solar companies such as SolarEdge Technologies (SEDG). But will bullish investor sentiment drive the company’s performance amid the pandemic? Read more to find out.

The solar energy industry has been soaring ever since Joe Biden won the Presidential election. President elect Biden’s $2 trillion dollar climate change plan has garnered investor attention from all over the world, as it is projected to reinvent the existing infrastructure and industrial sector in the country. With the solar industry driving the transition into a cleaner economy within the next 30 years, the Biden-Sanders task force has already outlined a plan to install 500 million solar panels across the United States within the next five years, which bodes well for SolarEdge Technologies, Inc. (SEDG). This has increased investor attention toward the Solar industry.

However, as the fear of a “second wave” is currently looming in the United States, along with limitations of widespread vaccination, growth in the Solar industry might take some time. Though SEDG has gained 138.9% year-to-date, current economic developments might lead to a massive sell-off in the near future, driving down the prices significantly. This, combined with several other factors, has led to a “Neutral” rating for SEDG in our POWR Ratings system.

Here’s how our proprietary POWR Ratings system evaluates SEDG:

Trade Grade: C

SEDG is currently trading above its 200-day moving average of $189.85, but below its 50-day moving average of $260.90, which doesn’t indicate a significant uptrend. The stock gained just 5.6% over the past three months, indicating limited bullishness.

SEDG’s revenues fell 18% year-over-year to $338.10 million in the third quarter that ended September 2020. This can be attributed to a 19% decline in revenue generated from business. Non-GAAP operating income declined 44% from the year-ago value to $50 million. Cash and cash equivalents declined 4.1% sequentially to $553.80 million over this period.

However, SEDG raised $550 million through a senior note offering in September, which is expected to fund its business operations and expansion plans. This should help the company recover quickly from the slump in its operations, as reflected in its third quarter results.

Buy & Hold Grade: C

In terms of proximity to 52-week high, which is a key factor that our Buy & Hold Grade takes into account, SEDG is positioned unfavorably. It is currently trading 28.5% below its 52-week high of $317.88, which it hit on October 20th.

SEDG’s revenue and EPS grew at a CAGR of 42.1% and 26.1%, respectively, over the past three years. The company’s total assets increased at a CAGR of 60.7% over the same period.

Industry Rank: C

SEDG is a part of the Solar industry, which is ranked #70 out of 123 industries in the StockNews.com universe. While a Biden win bodes well for the Solar stocks, given his stance on climate change, most stocks operating in this sector are tremendously overvalued right now, lowering potential shareholder returns.

In this regard, Mark Teppers, President of Strategic Wealth Partners said in a CNBC interview, “If Biden wins, I think these stocks eventually sell off anyways because there’s not a level of a Democrats’ plan that’s going to be perfect enough to justify these ridiculous valuations where they’re at right now. The Green New Deal would literally have to be $100 trillion to justify these valuations.”

Also, the rising number of coronavirus cases in the country ahead of the “second wave” threat requires higher funding to curb the spread, as the efficacy of the COVID-19 vaccine is still under question, given its stringent temperature requirements and limited production capacity by the end of this year. As a result, the solar industry is not likely to take off any time soon.

Peer Grade: D

SEDG is ranked #6 out of 16 stocks in the Solar industry. Other popular stocks operating in this industry are Enphase energy, Inc. (ENPH), First Solar, Inc. (FSLR), and SunPower Corporation (SPWR).

ENPH and SPWR beat SEDG by gaining 348.6% and 140.1% year-to-date, respectively. FSLR, on the other hand, has returned 45.5% over this period.

Overall POWR Rating: C (Neutral)

SEDG is rated “Neutral” due to its short-and-long-term bearishness, poor past performance, and bleak growth potential, as determined by the four components of our POWR Ratings.

The Winner

While SEDG is projected to grow significantly in the long term, the climate change crisis is expected to take a back seat due to the current economic and political situation amid the coronavirus pandemic. Hence, while the company should grow significantly once the economy recovers, investors should wait for a better entry point.

Out of 17 Wall Street analysts that cover the stock, only 6 rate it a “Strong Buy”. The consensus EPS and revenue estimates for the current quarter ending December 2020 indicates a 48.5% and 14.9% decline, respectively. However, analysts expect EPS to grow 12.3% next year, and at a rate of 20% per annum over the next five years. SEDG’s revenue is expected to increase 19.1% next year.

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SEDG shares were trading at $221.67 per share on Friday afternoon, down $5.53 (-2.43%). Year-to-date, SEDG has gained 133.12%, versus a 12.59% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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