SolarEdge might not recover until 2025 as residential solar market struggles to bounce back

Published Wed, Feb 21 20241:22 PM ESTUpdated Wed, Feb 21 20241:55 PM EST

SolarEdge might not recover until early 2025 as the company remains saddled with inventory in Europe and faces weak demand in the U.S., signs that the residential solar market in particular is struggling to bounce back in the face of high interest rates. SolarEdge's stock tumbled nearly 12% in midday trading Wednesday after the company's revenue guidance for the current quarter came in well below Wall Street's expectations. SolarEdge is one of the hardest-hit stocks in the battered solar sector, having hemorrhaged $12.3 billion in market cap over the past 12 months. Companies such as SolarEdge with heavy exposure to the residential solar market have faced a collapse in demand as high interest rates have made installations more expensive for households, leaving the industry buried with too much inventory. CEO Zvi Lando told analysts during SolarEdge's earnings call Tuesday that the company won't clear its inventory backlog until the end of 2024, though he expects underlying demand to normalize at $600 million to $650 million in the second half of the year. Wall Street was broadly skeptical of that forecast with several top analysts slashing their price targets amid an outlook that is still too uncertain. Goldman Sachs reiterated its call for investors to sell the stock and slashed its price target to $64, implying 24% downside from Tuesday's close of $84.42. Analyst Brian Lee said SolarEdge's revenue normalization could easily slip into 2025 if demand remains weak in the current quarter. Citi said SolarEdge remains a high-risk stock with the investment bank slashing its price target by $6 to $83. Analyst Vikram Bagri also cautioned that SolarEdge might not sort out its inventory problems until the first quarter of 2025. "Skepticism about magnitude of recovery in 2H24 persists," Bagri told clients in a research note Wednesday. Some analysts are openly questioning whether SolarEdge might need to raise capital soon. SolarEdge finished out the fourth quarter with about $635 million in cash on hand net debt, down 23% from $831 million in the prior quarter. Chief Financial Officer Ronen Faier told analysts Tuesday that the company does not see a need to raise capital at the moment. In fact, SolarEdge plans to begin a stock buyback program of $300 million in the first quarter, a decision that surprised Barclays analyst Christine Cho given the high level of uncertainty in the market. Cho rates SolarEdge as underweight with a price target of $50, implying 40% downside from Tuesday's close. "As it doesn't appear to us that the company will start generating cash until 2Q24, we think it's more prudent to hold onto the cash until the recovery and revenue ramp up is realized in a more material manner," Cho told analysts in a research note Tuesday. SolarEdge's stock performance stands in stark contrast to competitor Enphase . The companies both manufacture inverters, a crucial component that converts the power harvested by solar installations into usable electricity for households and the grid. Enphase CEO Badri Kothandaraman gave a more optimistic outlook after the company reported earnings Feb. 6, predicting a bottom in the first quarter of this year that would be followed by a recovery beginning in the second quarter as the stuffed inventory is cleared. "Make no mistake, utility rates are going up," Kothandaraman told CNBC in an interview after the company's quarterly report. "The interest rates are not going to be staying the same." "All of those won't move the market overnight but they are all steady steps to make sure that the industry will grow long term," he said. Enphase's stock is up more than 19% month to date while SolarEdge has gained 12%. However, Citi analyst Bagri cautioned SolarEdge's poor performance could reverse some of the runup in Enphase shares. Enphase's stock was down 2.3% Tuesday, though the broader equity markets were also negative. SolarEdge CEO Lando did provide some brighter news Tuesday, forecasting that the European residential solar sector will bottom in the current quarter and improve thereafter. The commercial market in the U.S. also continues to grow, Lando said, though he doesn't expect much change in the residential space until interest rates decline. When interest rates will decline in the U.S. remains an open question, though the market is tempering its expectations as inflation remains stubborn. The market has pushed back expectations for rate cuts until June rather than March and May previously. Investors might receive further insight on where the solar market goes from here when residential installers Sunrun and Sunnova report earnings after the bell Wednesday. Both stocks were lower in trading ahead of the report. — CNBC's Michael Bloom contributed to this report.