SolarEdge has had an impressive run over the past six months as its shares have beaten the S&P 500 by 12.2%. The stock now trades at $45.94, marking a 15.6% gain. This run-up might have investors contemplating their next move.
Is now the time to buy SolarEdge, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think SolarEdge Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on SolarEdge for now. Here are three reasons we avoid SEDG and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. SolarEdge’s demand was weak over the last five years as its sales fell at a 4.1% annual rate. 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 posted positive free cash flow 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 7.5%, meaning it lit $7.54 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, SolarEdge’s ROIC has decreased significantly over the last few years. 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. With its shares outperforming the market lately, the stock trades at 490.2× forward P/E (or $45.94 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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