SolarEdge's Shaky Road Ahead: Analysts Highlight European Demand Concerns And Marginal Challenges

SolarEdge Technologies, Inc. SEDG shares plummeted heavily on Friday after reducing the Q3 revenue outlook to $720 million-$730 million vs. $880 million-$920 million earlier and below the consensus of $909.02 million.

The company's earnings call is scheduled for Wednesday, November 1, 2023.

Goldman Sachs analyst Brian Lee downgraded to Neutral from Buy, lowering the price target to $131 from $254.

Lee writes that after a second straight quarter of revenue (and now) margin disappointment, the path for shares to recover will be challenged until SEDG can re-establish top-line growth and gain some traction in improving its margin profile.

On the former, the demand environment in Europe is now a significant question mark heading into 2024, and the issue is much larger than simply seasonality at this point as inventory, weaker demand, and potential market share issues are likely to be focus items for the next few quarters.

On the latter, the margin issue is now materializing once again, and the analyst notes that margins have historically been a key driver of stock performance at times.

While the company did not provide specific guidance for Q4, SEDG noted that revenue is expected to be significantly lower, and the analyst now models a roughly 10% sequential decline off the much lower range for Q3.

While the disappointing and weak demand outlook wasn't altogether surprising, the analyst added that he is struggling to understand the magnitude of SEDG's guide down in gross margins, which are now being guided down almost 1000bps from the 28%-31% view that was provided just a few months ago.

Based on the uncertainties, the analyst's 2023-2025 adj. EPS estimates move down to $6.23/$5.18/$9.60 (vs. $9.33/$10.35/$13.50 prior) to reflect lower revenue and margins.

Scotia Bank analyst Tristan J. Richardson reiterated the Sector Perform rating on SEDG, lowering the price target to $120 from $170.

Richardson reduced the Q3 revenue estimate to $724 million from $898 million previously on channel inventory concerns and slower installation rates.

According to the analyst, demand has been compressed by the current rate environment. 

The analyst highlights cancellations in the EU by distributors and pushouts of existing orders significantly elevated inventory in the channel, particularly in Europe.

The analyst also lowered the Non-GAAP gross margin estimate to 20.1%, down from the previous estimate of 28.7%

Richardson revised shipment projections to 1.1 GW of residential and 2.3 GW of commercial shipments, totaling 3.4 GW or down 21% sequentially.

While precisely the pace of 4Q is unclear, Richardson cut 4Q estimates to $578 million, down from $928 million on the trends the company noted for September.

Piper Sandler analyst Kashy Harrison reiterated the Overweight rating, lowering the price target to $110 from $210.

Harrison notes that since the European channel was the main driver of the weakness, the analyst reduced the European resi expectations and assumed continued weakness into 4Q'23.

The analyst expects GM to deteriorate further in 4Q23. Harrison reduced the 4Q23 revenue estimate to ~$500 million from $805 million and EBITDA to -$46 million from +$91 million. 

The analyst also reduced FY24 EBITDA to $334 million from $868 million and FY25 EBITDA to $786 million from $1.3 billion.

For the stock to recover in the coming months, the analyst highlights that SEDG needs to make a case for a recovery in 2H24 revs/EBITDA.

Price Action: SEDG shares are trading lower by 27.2% to $82.93 on the last check Friday.