Shareholders of SolarEdge would probably like to forget the past six months even happened. The stock dropped 27% and now trades at $32.93. This may have investors wondering how to approach the situation.
Is there a buying opportunity in SolarEdge, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think SolarEdge Will Underperform?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons why SEDG doesn’t excite us, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, SolarEdge’s demand was weak and its revenue declined by 3.4% per year. This wasn’t a great result and is a sign of poor business quality.
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While SolarEdge’s free cash flow broke even this quarter, the broader story hasn’t been so clean. SolarEdge’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.4%, meaning it lit $7.43 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, SolarEdge’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping their customers, but in the case of SolarEdge, we’re out. Following the recent decline, the stock trades at 138.5× forward P/E (or $32.93 per share). At this valuation, there’s a lot of good news priced in – we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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