Solar Stocks Are Hot!!

Solar stocks are flying – especially those that make & sell inverters, like Enphase (ENPH-NASD) and SolarEdge (SEDG-NASD).

Quick refresher: inverters  are devices that try convert power from DC (solar panels) to AC (what your home uses).  There are lots of inverters out there, with slightly different technologies, but all are meant to maximize the AC power out of your DC photovoltaic panels.

This market has just gone CRAZY this year – out of the blue. It’s a grassroots demand scenario that has COMPLETELY taken the Market by surprise. 

How do I know this?

Look at the gaps in the stock charts of both ENPH and SEDG – the Market had not priced anywhere close to the kind of growth these two inverter market leaders are going through right now.

This is happening despite trade wars, despite Chinese tariffs (SEDG is opening a 2^nd plant in Vietnam now; ENPH is opening one in Mexico).

Sell side research I’m reading says component parts pricing has come down A LOT… making solar much more economic.  There does appear to be areas where solar can compete against greenfield coal baseload power or against natgas peaker plants (expensive back-up facilities that are only used during peak power times during the day).

SEDG CEO Guy Sella said on the Q2 conf call that nobody buys solar for subsidies anymore.  I would argue that’s not quite true, as analysts are suggesting the end of subsidies is now actually pulling forward demand.

But the volume of units sold and the stock charts say he is mostly right.

SEDG is a big story on both sides of the Atlantic, in both Europe and the USA – Europe was 48% of business and the USA was 41%.  The ROW – Rest of World – was 11%.

The Market is right to love this story – SEDG – as the growth is phenomenal, it’s organic, it’s not just about the USA, it’s both residential and commercial… and the balance sheet is pristine.

AND… the Market is excited about new products for utility sized solar and energy storage…

AND… management keeps showing innovations not only in new products (mgmt. has made several M&A moves recently, vertically integrating their business and using various technologies together in new ways) but also reducing costs on existing products

AND… there appears to be room for everyone.  Competitor Enphase announced 100% increase in YoY revenues, and it had the same kind of jump recently.

Here are some of the quick financial highlights from SEDG Q2:

• Record revenues of $325.0 million
• Record revenues from solar products of $306.7 million
• GAAP gross margin of 34.1%
• GAAP gross margin from sale of solar products of 36.4%
• Non-GAAP gross margin from sale of solar products of 36.9%
• GAAP net income of $33.1 million
• Record Non-GAAP net income of $49.3 million
• GAAP net diluted earnings per share (“EPS”) of $0.66
• Record Non-GAAP net diluted EPS of $0.94
• 1.3 Gigawatts (AC) of inverters shipped

I think the Market is ready to start pricing in some great revenue growth as both ENPH and SEDG move from inverter sales to full solar package sales, which is the difference between a $2000 sale and a $10,000 sale.

Who knows what that will mean for margins.  Again, the financial Market is saying there is room for both these companies and it will likely be a decade before the customer base is so saturated that each new sale is a zero sum game between the two.

I’ve owned SEDG in the OGIB portfolio a couple times, most recently when it gapped up to $53 – it was a clear breakout and the stock did not fall back into that gap once.  The stock is up more than 50% in just a couple months!  (I still own it.) Sadly, I convinced myself it had a better product and was more global than ENPH, so I didn’t buy ENPH.  But the Market is saying there is lots of room for both.

To that end, buying the solar ETF – TAN-NYSE – is not a bad idea. This market appears to have a very long runway as guidance is continuing to increase.

Solar has been one of – if not THE best trade in energy this year, but it sure took the Market by surprise.

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