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SolarEdge – a superstock on a mission to save the planet

October 17, 2020

SolarEdge has invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (PV) system. The SolarEdge DC optimized inverter system maximizes power generation at the individual PV module-level while lowering the cost of energy produced by the solar PV system.

Since beginning commercial shipments in 2010, SolarEdge has shipped over 19.5 Gigawatt (‘‘GW’’) of its DC optimized inverter systems and its products have been installed in solar PV systems in 133 countries.

SolarEdge’s mission is to become the leading provider of inverter solutions across all PV market segments and broaden the availability of clean, renewable solar energy.

Among many developments I have been struck by two recently, which make me think that renewable energy investments have an exciting future..

First are signs of growing investor interest in shares in companies that are at the forefront of the battle to shift the world away from fossil fuels and towards a sustainable future.

Second, the growing feeling that climate change is an even bigger threat than many people realise. I have always been worried that a warming world could hit a tipping point. Dramatic events that could occur are sudden changes in ocean currents and an accelerated release of methane gas from the Siberian permafrost.

Now I have discovered another scary possibility. Apparently, rising global temperatures have an effect on cloud cover. This is complicated but one theory is that if the planet warms by four degrees this will lead to clouds breaking up and remove cloud cover. Since, at any given time around two thirds of the planet is covered by clouds this would trigger accelerated warming potentially by another eight degrees, so 12 degrees in all.

The last ice age occurred when global temperatures were 4.5 degrees lower than today so plus 12 degrees would be devastating. It would literally threaten life on earth. In the circumstances and with the increasing move of climate conscious millennials and the younger generation Z into positions of power it is no surprise that interest in sustainable energy is growing.

Any threat to cloud cover may be 100 years in the future but just the possibility should help concentrate minds. My guess is that fossil fuels may end up being perceived in rather the same way as many people now regard cigarette smoking.

This is a perfect backdrop for companies like SolarEdge to grow rapidly and as we shall see below the company, which is all about using technology to help solve the world’s problems, is a very fast- growing impressive and ambitious business.

SolarEdge Technologies SEDG  Buy @ $301  MV: $15.2bn  Employees: Next figures: 5 November  Times recommended: 4  First recommended at $147.75

The companies that are most exciting in today’s world use sophisticated technology and are led by very clever people. It is not surprising that it is a slow process for me and almost all investors to fully understand these businesses, what they do, how they do it and their plans for the future.

Indeed, I think this is one of the reasons for the volatility in markets. Investors are buying shares without knowing what they are buying into so when the shares fall they panic and sell.

The way I operate is that if a company feels like a good one, i.e., 3G plus signs of magic, I recommend the shares. This happened with SolarEdge after a subscriber drew my attention to the business. As happens with other shares, the more I understand about what they are doing the more I understand why they are a good one, which culminates in a deeper dive into the company and a superstock recommendation.

As also often happens SolarEdge has already more than doubled on my first alert but I still think it is early days in this exciting company’s story. I watched a long interview with the CFO of the business, Ronan Faier. I was impressed with him and his deep grasp of the business. He has been there since 2011. I was also impressed with management’s plans for the business and the huge scale of their ambitions.

Tragically, the business lost its founder, Guy Sella, to cancer at the early age of 54 but it still has a strong management team.

The company started by inventing a more efficient inverter. (A solar inverter or PV, photo-voltaic, inverter, is a type of electrical converter which converts the variable direct current output of a photovoltaic solar panel into a utility frequency alternating current that can be fed into a commercial electrical grid or used by a local, off-grid electrical network.)

In effect, SolarEdge came out with a better mousetrap and that has led to dramatic growth in the business.

Growth comes in two ways. First, the company sells more inverters and growth has been dramatic. In 2010, the company shipped an estimated 250,000 power optimisers and 12,000 inverters – amounting to a total generation of 50 megawatts and 70pc of the power optimisers market.

Things have moved on a bit since then. “Overall this quarter (Q2 2020), we shipped 3.5m power optimisers and 142,000 inverters.” Overall the company has shipped over 16 gigawatts (16,000 megawatts).

Secondly, not only are they shipping more inverters but the inverters are becoming dramatically more powerful. I haven’t got the figures but the change is massive, like 10 times or more with a significantly more powerful inverter due later this year.

Just to complete the picture this is what a power optimiser does.

“A power optimizer is a DC to DC converter technology developed to maximize the energy harvest from solar photovoltaic or wind turbine systems. They do this by individually tuning the performance of the panel or wind turbine through maximum power point tracking, and optionally tuning the output to match the performance of the string inverter. Power optimisers are especially useful when the performance of the power generating components in a distributed system will vary widely, such as due to differences in equipment, shading of light or wind, or being installed facing different directions or widely separated locations. Power optimisers for solar applications can be similar to microinverters in that both systems attempt to isolate individual panels in order to improve overall system performance. A smart module is a power optimiser integrated into a solar module. A microinverter essentially combines a power optimizer with a small inverter in a single enclosure that is used on every panel, while the power optimizer leaves the inverter in a separate box and uses only one inverter for the entire array. The claimed advantage to this “hybrid” approach is lower overall system costs, avoiding the distribution of electronics.”

As you can imagine a package or module that lowers costs and makes solar and wind power more efficient is going to be a huge success. This is what has driven the impressive growth in SolarEdge Technologies to date and as the world shifts over to renewable energy and SolarEdge keeps improving its technology there is plenty more growth to come. Sales have grown by more than 50pc in each of the last two years although growth will be slower this year because of the impact of the virus, especially when it first struck and everybody stopped doing anything.

As became apparent from the interview with Faier, solar power inverters are just one of three business legs for which the company has plans and it is making big strides to realise those ambitions.

One area into which it is going is batteries. Faier obviously understands a great deal more about all this than I do but apparently there are differences between EV batteries (batteries for electric vehicles) and solar power batteries (batteries to work with residential and commercial solar power). EV batteries need to ramp up quickly to deliver the spectacular acceleration for which EVs are known. Most of the global effort on batteries is going into EV batteries.

SolarEdge wants to turn its attention to developing dedicated solar power batteries, which benefit from not needing to deliver great acceleration and so can deliver lower cost and greater efficiencies. The idea is that over time the group will become a one-stop shop, providing both highly efficient power conversion and affordable storage in one package. This is important in its own right but also means that the group will be able to provide support for the whole installation, which is like to make them very popular with installers.

The company is also working on EV batteries as are many others. SoloarEdge is developing batteries for vans not cars. There are some 2m light vans sold a year and the batteries they use cost between $20,000 and $25,000 making this a very attractive medium term opportunity. The plan is to try and partner with one or two major automotive manufacturers as what they call in the industry a tier one supplier. Any news of such a link-up would likely have a dramatic effect on the shares and ties in with something else the company is doing..

“SolarEdge are one of the leading manufacturers of Inverters and their latest product brings the world of electric cars and solar panels even closer together with the world’s first EV inverter. In a simple package designed to make it even easier for these two technologies to work together – so you can power your car from sunshine. SolarEdge’s EV charging single phase inverter enables homeowners to charge their electric vehicles directly from the power of the sun, maximizing their solar usage and further reducing their electricity bills. They will also benefit from the ability to charge EVs up to 2.5 times faster than a standard EV charger through an innovative solar boost mode that utilizes grid and PV charging simultaneously. By installing the EV charging inverter, you’ll benefit from the reduced hassle of installing separately a standalone EV charger and a PV inverter, as well as integration with the SolarEdge monitoring platform.”

Incidentally, the group already has a longstanding partnership with Tesla but this is on the solar energy side, where Tesla has huge ambitions. SolarEdge acquired a battery business/ factory in South Korea in 2018 for $88m. The factory is being expanded to make two gigawatts of output v 750kw at the time of acquisition. I think I am right in saying that each gigawatt represents around $250m in annual revenue. (A gigawatt is 1bn kw or enough to power around 725,000 homes).

Most of the group’s output of inverters and optimisers is made by third party contract manufacturers, making the business capital light in its early days, when money was tight.

Now the business has no debt and is generating plenty of cash the group is working to improve the production process. It is building a factory in Israel, where the business was born, to explore achieving great automation and lower costs in the factories making all its growing range of products in the future. This is reminiscent of Elon Musk’s comment that the challenge with electric vehicles is not making the cars but building the factories that make the cars.

It plans to use these learnings to make its third party partners’ factories more efficient.

SolarEdge sees itself not just as solar company but a power company supplying smart energy for all sorts of applications, residential, still the bulk of the business, commercial, transport, electric engines and wherever power is needed and can be delivered in a sustainable way. As Faier puts it the company’s core competence is power conversion.

A common element in power conversion, which explains the group’s ambitions and opportunity is the widespread need for inverters

Incidentally, the way Faier describes the company’s three legged opportunity is: inverters, electrical engines and grid management. Put like that it suggests a big opportunity and a bottomless need for ever-better technology.

The company also plans to use its growing balance sheet strength and a recent $500m capital raise (from an issue of convertible equity) to make more acquisitions.

The combination of a strong following wind from the worldwide shift to renewables plus great technology, strong trading and huge ambition makes SolarEdge Technologies a superstock and an investment with great potential.

A never-sell approach to investing only works with a long-term approach and by long term I mean years. Warren Buffett’s famous dictum says that you should only buy a share if you plan to hold for at least 10 years. This means behaving like an owner, as though you had bought shares in a private company and share sales were very difficult to make.

Never selling and taking a long term view makes investment a surprisingly peaceful business. Many things that happen in the short term fade into unimportance if you expect to hold a share for 10 years. The only thing that matters is that the business should scale dramatically over that period.

Amazon shares have been a great investment because over the last 20 years they have increased sales by over 18,000 per cent. They have been able to do that by expanding their product range from books to almost everything but they have also had a powerful following wind.

20 years ago, there were just 40m people using the internet in the U.S., and online sales generated only $2.4bn. Now more than 313m people in the US alone use the internet –– and online sales are on course to top $800bn.

Just one investment like Amazon can be a game changer for your portfolio so imagine what a few of them could do; with QV for Shares there is an excellent chance that you will invest in many such amazing businesses but you have to give miracles a chance. Bezos has become one of the world’s richest men because he has held his shares (most of them) for all that time. Most of us find that very hard to do.

Never-sell gives you and miracles a chance. Chop out the obvious duds as well and keep investing in new potential superstocks and the end-results could be amazing. Doing something similar has enabled Warren Buffett to amass a fortune around $80bn despite giving away $37bn.

He was hit hard by the crash associated with the coronavirus, losing $21bn at one stage. Naturally he didn’t sell so now he has made it all back again and more and is well placed to benefit from a continuing rising stock market. Most of the shares he bought decades ago he still holds. He behaves like an owner with all the stocks he holds.

It is so simple but so few investors manage to do the same.

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