SolarEdge has been on fire lately. In the past six months alone, the company’s stock price has rocketed 150%, setting a new 52-week high of $78.96 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in SolarEdge, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think SolarEdge Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons you should be careful with SEDG, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate 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 2.3% per year. This wasn’t a great result and is a sign of poor business quality.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 7.4%, meaning it lit $7.40 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. 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 cheer for all companies making their customers lives easier, but in the case of SolarEdge, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 127.3× forward P/E (or $78.96 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the most entrenched endpoint security platform on the market.
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