SolarEdge enters 2019 as more than an inverter company.
After seizing a lead the publicly traded company embarked on a string of acquisitions that expanded its footprint.
SolarEdge coupled that growth with organic growth: It delivered 1.1 gigawatts-AC to get a record earnings of $263.7 million in Q4, according to the earnings data released Wednesday. Annual earnings reached $937.2 million, just shy of $1 billion and up 54 percent compared to the year earlier.
Internally, SolarEdge is expanding into larger-scale inverters, and adding new product lines like connected home energy appliances, including EV charging. It has also launched a grid services offering to assist systems that were installed turn into assets.
All revenue still comes from inverters; the acquisitions showed up as a cost center this year, weakening margins and earnings per share. However they open up avenues for company expansion into markets like battery storage and electric vehicles.
In the previous year, SolarEdge took control of uninterruptible power source company Gamatronic, South Korean battery maker Kokam and Italian electric vehicle drivetrain firm SMRE. The latter deal closed in January, with SolarEdge buying a 57 percent stake for $85 million and planning to pick up the remaining stocks over time.
The expansion into new markets insulates SolarEdge against competition in the solar inverter space. The challenge will turn the buying spree into a company as opposed to a distraction from the affair.
“Macro-wise, we are getting more and more a intelligent energy provider and less a pure-play inverter provider, but we are still super dedicated to providing state-of-the-art inverters and solutions to the market,” said Lior Handelsman, founder and VP of marketing and product strategy, in a December interview.
Solar companies must face the shadow of SunEdison, the solar supermajor that collapsed beneath the weight of its debt. SolarEdge includes a simple antidote to ward off that malady: paying in cash.
“We are very far from where SunEdison was in terms of a company that had billions of dollars of debt ” Handelsman said.
Even after falling $101.2 million for Kokam, SolarEdge finished the year with $392.2 million in cash on hand, enough to make further purchases a different possibility.
Electric vehicle expansion
The SMRE acquisition constructed on the similarity between electric drivetrains and the power conversion SolarEdge does for solar systems. SolarEdge had made forays to EV charging products.
“By having this automotive arm, we now have a bigger market to access: not just the solar market but the electric vehicle market,” Handelsman said in a February interview.
The company stands to benefit from SolarEdge's power and supply chain, he added.
In-house cell production is now included by that supply chain from Kokam, which could supply the battery packs SMRE makes for drivetrains. This is comparable to the arrangement Panasonic provides cells for Tesla's battery packs, but with ownership.
Kokam produces high-grade batteries, but even with over 900 megawatt-hours of lithium-ion cell production globally, it lacks the scale of heavyweights like LG Chem and Samsung.
“We can provide the capital and some of the market access, and Kokam can provide us with the ability to diversify and sell better energy storage systems and reduce our dependency in other storage lithium-ion companies,” Handelsman said.
That could prove especially valuable given that cells have been in short supply, pushing job deliveries for the storage market back.
Batteries are entering the house market, so the Kokam relationship can fuel SolarEdge's core product. But in addition, it opens up a line to the storage market. Late last year, Kokam announced it will supply 40 megawatt-hours of batteries into the South Korean grid.
The company lines could well merge. EV charging requires power than a typical home uses, and the car. The ability to control charging alongside solar and stationary storage creates possible value for SolarEdge's grid services offering.
That said, the companies will take the time to return profits that are meaningful to the company. Revenue will be dominated by inverters for the next few years, Handelsman noted.
“Smoke but no fire”
SolarEdge prides itself on providing value that is higher and avoiding the race to the bottom on price. The inverter market, like the solar power market in general, is in danger of commoditization.
It’ll be hard for the industry to sustain 6 to 10 percent year-over-year cost declines said Ben Gallagher, senior analyst at Wood Mackenzie Power & Renewables. If inverter margins tighten up, diversification creates an alternative path for growth.
“If their entire business is focused on trying to squeeze out other companies in the residential and small commercial PV inverter market, there’s not as much upside as trying to become this larger energy services provider,” Gallagher said.
For now, though, SolarEdge retains a dominant lead in the U.S. residential PV market and continues to take share from its competitors, Gallagher noted.
Wall Street analysts have spent the past few years worrying about what would happen to SolarEdge stock, now trading at around $43, when Chinese telecom giant Huawei launched its residential inverter in the U.S.
Huawei's competitive pricing and sales strategies have pushed down inverter prices elsewhere in the world, but the game-changing U.S. coming keeps failing to materialize. The company's reputation in the U.S. has slipped recently due to security concerns, further hindering its adoption.
“Huawei’s residential product is really appealing, but right now there’s mostly been smoke but no fire,” Gallagher said. “With all of the geopolitical stress around Huawei’s involvement with the Chinese government, that could delay any additional gains in the U.S. market.”
With that significant competitor at bay for the future, SolarEdge has some breathing room to plot its new strategic course.
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