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Creating a portfolio full of winners and a great example – SolarEdge Technologies is taking the market for solar-energy by storm but as a supplier of tools, not a principal and we all know from our gold rush days why that is a very good idea

August 6, 2020

SolarEdge Technologies/ SEDG Buy @ $214  MV: $10.7bn  Employees: 2,431  Next figures due: 5 November

Before I write about SolarEdge Technologies, which I believe to be an exciting business with a great long-term future (and thanks to the subscriber who alerted me to this company) I want to discuss the whole QV strategy of creating a portfolio of winners. SEDG already looks like one having been featured twice to date at $147.575 and $174.

This already exemplifies two key QV strategies. The first is to relentlessly buy more of your winners so they play an increasingly key role in your portfolio. The second is not to be afraid of star performers. The fact that SEDG shares are racing higher, allied to the outstanding fundamentals (see below) just reinforces my enthusiasm for the shares. It does not put me off from buying, quite the contrary.

A portfolio of winners

Wall Street increasingly is a world of traders. These are people whose idea of making money in the stock market is to get up in the morning, wrap a wet towel around their head, think hard, get an idea, perhaps from some service to which they subscribe, buy the shares, watch them go up and then near the end of the day, sell and bank a profit. They like this approach because this is real money not a potentially illusory paper profit.

So I want to get this absolutely straight and clear. I am NOT one of these guys. I am not a trader, I do not cater for traders and if you want to trade I am probably not your man. I am a paper profits guy. Like Jeff Bezos I am totally OK with being a billionaire on paper and all my investing activities are directed to that aim. I never trade, ever. My whole strategy is build around creating a buy and hold portfolio of winners. As long as I believe in a stock, which basically means it exhibits a mix of 3G (great growth, great chart, great story), magic, something new and relentless success in winning territory/ gaining market share, I never want to sell. My dream is to hold a share for a decade and see it rise 100-fold in value. If I could have 10 of those – totally awesome!!!

So that is what Quentinvest for Shares is all about – building a portfolio of winners and I mean BIG winners. This is not a buy and forget strategy because if a stock is clearly no longer 3G, no longer winning the battle for territory, no longer a high-energy disruptor but a low-energy disruptee it will not stay in my portfolio of winners. How can it when it is no longer a winner?

SolarEdge catches fire

Like so many exciting stocks in the 21st century a veteran of an earlier coal and steam age like me finds it hard to get his head around SolarEdge Technologies. I think of it as a solar company but read this analysis by one fan and it seems it is really a semiconductor business.

“As a profitable semiconductor company, SolarEdge has outperformed the S&P 500 by 54pc ytd (year to date). The company is clearly valued highly by its own insiders as they own over $140m worth of shares. When those who run the company have a considerable stake it shows confidence and a passion for the company. In the past three years, this semiconductor company has shown a 44.3pc sales growth as well as a 37pc earnings growth, with a forecast for the next 1-3 years of 30pc. This is after a reduction in solar panel installations due to COVID-19.

SolarEdge is notable for its innovation in power optimisation by creating a cheap, yet less problematic alternative to the power transfer from DC to AC energy.

Solar panels are not the only thing this company is playing with. Acquiring Kokam in 2018, a South Korean battery company has added battery storage, which can help integrate solar power into everyday power solutions. In 2019 SMRE Spa was also acquired, opening up the e-mobility market and adding its innovation and potential revenue to SolarEdge’s portfolio.”

As you can see from the above the company is doing well. I have confirmed this by collecting some key statistics. Turnover, a key indicator that a company is rapidly gaining market share, is racing ahead. The company’s year end is 31 December. In 2015 the group had sales of $325m. The sequence for the next seven years including three years of analysts’ forecasts is $490m, $937m, $1,426m, $1,495m (for 2020, a year affected by the virus and lockdown), $1,815m and $2,208m.

What does Solaredge do to achieve these astounding results. This is what the company says.

“Historically, the solar PV [photo-voltaic, the process by which sunlight is converted into energy] industry used traditional string and central inverter architectures to harvest PV solar power. However, traditional inverter architectures result in energy losses as well as systemic challenges in design flexibility, safety, and monitoring. Over the years, micro-inverter technology was introduced in an attempt to resolve these challenges, but this technology has certain inherent limitations. We believe that our DC optimised inverter system, consisting of an inverter and distributed power optimisers, best addresses all of these challenges.

Our system allows for superior power harvesting and module management relative to traditional inverter systems by deploying power optimisers at each PV module while maintaining a competitive system cost by keeping the AC inversion and grid interaction centralised using a simplified DC‑AC inverter. The entire system is monitored through our cloud‑based monitoring platform that enables reduced system O&M [operation and maintenance] costs. Our system enables each PV module to operate at its own maximum power point, known as MPP, rather than a system‑wide average, enabling dynamic response to real‑world conditions, such as atmospheric conditions, PV module ageing, soiling and shading and offering improved energy yield relative to traditional inverter systems. In addition to higher efficiency, our system’s installed cost per watt is competitive with traditional inverter systems of leading manufacturers and generally, lower than comparable micro-inverter systems of leading manufacturers. Furthermore, our architecture allows for complex rooftop system designs, reliability and enhanced safety capabilities which meets applicable safety regulations, known as rapid shutdown in the United States.”

As you can see from the above SolarEdge Technologies has two key products, power optimisers and inverters and it provides statistics on sales of these items. The shares started to climb in 2017 and in that year the group sold 7.4m power optimisers and 317,000 inverters. Over the next two years sales for these items rose to 11.4m and 15.4m for power optimisers and 454,000 and 664,000 for inverters. This in turn goes a long way to explain the strong growth in revenues for these years.

The first quarter of 2020 was off to a rip-roaring start with total revenue of $430m of which $408m was for the solar business. Sales of optimisers were 5m and 202,000 inverters. Revenues were up 59pc from $272m for Q1 2019. For comparison, in Q1 2019 the group sold 3m power optimisers and 131,000 inverters.  At the same time the group cautioned that progress would slow dramatically in Q2 2020 because of the virus.

This duly happened but nevertheless when the group announced its Q2 2020 results on 3 August 2020 the shares rocketed.I think the key reasons for this were that the results came in better than expected with a slight increase over Q2 a year earlier although well down on Q1 2020, there are signs of recovery in key markets like the US but most important of all, SolarEdge is clearly still gaining market share and winning the all-important battle for territory.

“Moving to Europe, where we have experienced a strong quarter of growth. Revenues in Europe this quarter were $144m, up from $122m last quarter. We attribute these positive results to two factors; the first is that while Europe has been impacted by the global pandemic, several countries in Europe have been quick to implement measures to keep the economy strong, including incentives in renewable energy.

Second, is our strong position in many countries in Europe, which enabled us to serve our customers during these challenging times and grow our business with them. In particular, in Germany, our three-phase residential storage inverter is gaining popularity and we believe that with demand, we are increasing our share in the three-phase residential European markets in Germany, Switzerland and others.

Our positive momentum in Europe is not limited to the German residential market and also includes increased revenues compared to last quarter in the Netherlands, Italy, Switzerland, Poland and France.

We are also happy with the positive momentum outside of the U.S. and Europe, where we are reporting the second consecutive record quarter, seeing strength in sales in Australia, Israel and Taiwan. You’ll see this momentum in both residential and the commercial segments.

In Japan, beginning in June, we started selling our Jet, JET certified inverter. And while these are still small quantities, it means that we are now able to address the residential and small commercial markets in this promising region.”

This strong performance in countries outside the US, what I call RoW, the rest of the world, is important because of another key trend at SolarEdge which is the rapid increase in sales outside the US. Since 2017 non-US sales have risen from $258m to $747m for 2019 and $144m for Q2 2020 despite widespread lockdown effects in the latest quarter. Since 2017 the percentage of sales outside the US has risen from 42.5pc to 60pc for the latest quarter. This is despite US sales climbing from $349m for 2017 to $679m for 2019 albeit with a flat virus-affected quarter in Q2 2020.

In conclusion about Q2 2020 the group said:

“We are proud even under these challenging circumstances we have successfully adjusted to the changing environment and are leveraging our proven execution capabilities to continue to deliver profits and generate cash while pushing forward our technology and innovation and investments in our future.”

A broader assessment of the outlook came in the 2019 annual report when the group noted:

“We continue to focus on our long‑term growth and profitability. We believe that our market opportunity is large and that the transition from traditional inverter architecture to DC optimised inverter architecture will continue as the architecture of choice for distributed solar installations globally. We believe that we are well positioned to benefit from this market trend. Additionally, we are expanding our offering with products such as storage inverters for increased self-consumption and backup, EV-charging inverters, smart meters, smart energy devices (sockets, water heater controllers, wireless relay), aimed to increase our average revenue per installation (ARPI). We intend to continue to invest in sales and marketing to acquire new customers in our existing markets and in adjacent markets, grow internationally and drive additional revenue. We aim to increase market share in the C&I [commercial and industrial] segment and penetrate the utility segment through specialised product development. We expect to continue to invest in research and development to enhance our product offerings and develop new, cost-effective solutions.”

The group is also spreading its wings more widely than solar energy.

“We believe that our strategy for continued growth in the solar market results in an efficient operating base with relatively low expenses that will enable profitability on lower revenues relative to our competitors. We believe that our sales and marketing, research and development, and general and administrative costs will decrease as a percentage of revenue in the long‑term as we continue to grow due to economies of scale. With this increased operating leverage, we expect our gross and operating margins to increase in the long-term. With respect to our penetration of non-solar businesses in which we have invested, we expect that we will need to make significant research and development, sales and marketing investments before making those businesses profitable.”

This development into a more broadly based non-fossil fuel energy-related business is being accelerated by acquisitions of which the group has made several in recent years.

One quote highlights the scale of the opportunity for the solar business.

“Traditional inverter architecture still constitutes the vast majority of the PV inverter market, especially for larger commercial and utility installations. However, traditional inverter architecture suffers from significant inefficiencies leading to suboptimal power generation.”

In the 2019 annual report there is a wealth of detail about the advantages of SolarEdge’s technology and the huge r&d efforts going into making it even better. My conclusion is that the business is shaping up as a massive winner in a key growth area – sustainable energy. Against that background a market value around $10bn could become multiples larger in future years. Some idea of the scale they have already achieved comes with the quote below:

“Our solar business strategy is to focus on penetrating new geographic regions and increasing our market share. More specifically, we focus on markets where electricity prices, irradiance and government policies make solar PV installations economically viable. Our solar products have been installed in 133 countries, including the U.S., Canada, Germany, Italy, Poland, Brazil, the Netherlands, the United Kingdom, Israel, Australia, Japan, Singapore, India, Taiwan, Korea, South Africa, Belgium, France, and China.

We target our sales and marketing efforts to the largest distributors, electrical equipment wholesalers, EPC contractors and installers in each of the countries where we operate. In the U.S., Germany, Italy, the United Kingdom, and Australia, our products are carried and actively sold by most of the top solar PV distributors as well as the largest electrical distribution companies that are active in solar PV. We anticipate that an increasing percentage of solar PV equipment sales will also occur through electrical equipment wholesalers who sell to a broad range of electrical contractors, and we are focused on cultivating these global relationships. As of 31 December 2019, according to data available on our monitoring platform, over 28,500 installers around the world have installed SolarEdge solar PV systems. We also sell our power optimisers pre-installed onto several PV modules for manufacturers that offer PV modules with our power optimiser physically embedded into their modules.

We offer our installer base a comprehensive package of customer support and training services, which include pre‑sales support, ongoing trainings, and technical support before, during, and after installation. We also provide customised support programs to PV module manufacturers, large installers and distributors to help prioritise and track support issues, thereby enabling short cycle times for issue resolution. In 2019, we conducted approximately 308 training events in 26 countries, with an aggregate of approximately 7,851 attendees.”

As a business SolarEdge is very international.

“As of 31 December 2019, we had 2,431 full‑time employees. Of these full‑time employees, 755 were engaged in research and development, 416 in sales and marketing, 1,031 in operations, production and support, and 229 in general and administrative capacities. Of our employees, 1,161 were based in Israel, 295 were based in Korea, 235 were based in the U.S., 185 were based in China, 197 were based in Italy, and an additional 358 were based elsewhere.”

They look like a business going from strength to strength and providing services which the world very much needs.

I don’t pretend to know what power optimisers and inverters are all about let alone AC and DC current. I have watched videos about it but am still little the wiser. I don’t think that matters. It is the job of the engineers at SolarEdge Technologies to understand all that stuff. What I can see is that (a) they are decisively winning the battle for territory with massive gains in market share and (b) they have all the characteristics of a 3G+magic+something new business. They look an ideal constituent for a portfolio full of winners.

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