Analyst Insights

Citi Assigns Neutral Rating to SolarEdge Amid Transition Year Challenges

Citi sets a price target of $31, citing high inventories and weak demand but highlights long-term growth potential in solar and energy storage

By Harrison Wall

7/11, 09:04 EDT
article-main-img

KEY FIGURES

Stock Rating: Neutral / High Risk
Revised Price Target: $31.00
Previous Price Target: N/A
Stock Price (July 10, 2024): $29.63

Summary Points

  • SolarEdge faces a transition year in 2024 with high inventories and weak demand, but remains well-positioned for long-term growth in solar and energy storage.

  • Citi assigns a Neutral rating with a $31 price target, based on 2025 EBITDA and EPS estimates, awaiting inventory reduction and margin improvement.

  • Despite near-term challenges, SolarEdge's diversified product portfolio in MLPE, energy storage, and EV components supports future growth prospects.

Transition Year for SolarEdge Amid Market Challenges

Citi's latest equity research report on SolarEdge (SEDG.O) focuses on the company's strategic positioning and the challenges it faces in 2024. The report, titled "Feedback on SEDG Note; Easier Said Than Done," highlights that SolarEdge, a leading provider of optimized inverter solutions, is navigating a transition year marked by higher channel inventories, tepid end-market demand, weaker margins, and intense competition. Despite these headwinds, SolarEdge's diversified product offerings in energy storage, EV components, and home energy management position it well for long-term growth.

Neutral Rating and Price Target of $31

Citi has assigned a Neutral/High Risk rating to SolarEdge, with a price target of $31. This valuation is based on an average of 14x the 2025 EBITDA estimates, 16x the 2025 EPS estimate, and a discounted cash flow (DCF) valuation. The report underscores that while SolarEdge is poised to benefit from the growth in solar and storage installations and EVs over the next several years, the current market conditions warrant a cautious stance. "We will wait for progress on inventory reduction and margin improvement to be more constructive," the Citi analyst notes, emphasizing the need for a better entry point.

Inventory and Margin Pressures

The driving factors behind the updated price target and stock rating include several macro and company-specific challenges. Higher channel inventories and tepid end-market demand are expected to weigh on SolarEdge's performance in 2024. Additionally, the company faces weaker margins due to intense competition in the solar market. The report also highlights the impact of regulatory uncertainties and the execution risks associated with SolarEdge's push into energy storage and e-mobility. "2024 will be a transition year for the company as it faces several headwinds including higher channel inventories, tepid end market demand, weaker margins and intense competition," the analyst states, capturing the essence of the current challenges.

Strategic Growth Initiatives

Despite the near-term challenges, SolarEdge's long-term growth prospects remain robust, driven by its diversified product portfolio and strategic initiatives. The company is a top player in the global module-level power electronics (MLPE) market and is expanding its footprint in energy storage systems, EV chargers, and uninterrupted power supply solutions. These initiatives are expected to drive growth as the adoption of solar and storage installations and EVs accelerates over the next several years. However, the report advises caution until there is clear progress on inventory reduction and margin improvement.

Valuation Recap and Financial Outlook

Citi's valuation of SolarEdge at $31 per share is underpinned by a combination of EBITDA, EPS, and DCF metrics. The DCF valuation uses a weighted average cost of capital (WACC) of approximately 10% and a terminal growth rate of around 3%. The premium to the average multiple is justified by the growth outlook for global solar installations and SolarEdge's strong balance sheet and free cash flow (FCF) outlook. However, the high volatility of the stock and several risks, including potential slowdowns in solar installation growth and regulatory changes, warrant a high-risk rating. "We think the premium to average multiple is warranted given the growth outlook for global solar installations, as well as SEDG's strong balance sheet and FCF outlook," the analyst concludes.