SolarEdge shares fell this week after the company’s second-quarter results showed margins were hit by factory closures, higher transportation costs and currency headwinds from a weaker euro.
But SolarEdge Chief Financial Officer Ronin Fire said lower margins now are the price to pay for long-term growth in a market where demand is so high.
“We have a demand that far exceeds anything we can plan, anticipate and even grow,” he told CNBC.
SolarEdge posted record revenue of $727.8 million during the second quarter, just below the 730.7 million analysts surveyed by StreetAccount.
The company’s non-GAAP gross margin came in at 26.7% last quarter, down from 33.9% in the same quarter a year earlier. For the current quarter, the company expects gross margins to be between 26% and 29%.
Shares fell 19% on Wednesday as investors reacted to the light guidance. The stock regained some of its gains on Thursday and Friday, but remained down 10% for the week. However, over the past month, the stock is up 17%.
Fire noted that roughly 47% of the company’s revenue comes from Europe, which means the company is highly vulnerable to a falling euro. In addition, one factory in China had to shut down temporarily during the country’s strict Covid lockdowns, halting production at a time when supply chains were already tight.
In an effort to meet orders in a timely manner, SolarEdge eventually chose to ship some goods by air, which is ten times more expensive than shipping by sea.
Company executives saw it as a smart, long-term business decision. In addition to enhancing customer loyalty by sticking to delivery schedules, it is a way to maintain market share in a highly competitive market.
“The market doesn’t live in a vacuum,” Fire said, calling it a “battle for market share.”
Europe: a key growth area
Growth in Europe presents a huge opportunity for solar companies as the conglomerate scrambles to move away from dependence on Russian energy. The European Union has laid out plans for a rapid expansion of renewable energy through its REPowerEU plan. Germany alone is expected to triple its annual solar installation rate within two years, making the country larger than the US market, according to Fire.
With energy prices in Europe at record levels, solar energy is also a way for consumers to relieve inflationary burdens.
“You want to be very strong in those markets that are poised for very good growth going forward,” Fire said.
SolarEdge isn’t the only company looking to capitalize on Europe’s energy crisis. Competitor Enphase saw its second-quarter earnings in Europe jump 69% on a quarterly basis.
Enphase CEO Badri Kothandharaman said he believes the company’s international division will grow from 20% of the company’s revenue today to nearly 50% over the next few years, mainly due to European expansion.
Getting into a customer’s home is especially important as solar companies – including SolarEdge and Enphase – look to offer more products. In an effort to electrify the entire home, having that first product in the door can mean the customer is using the same company for a backup battery system and EV charger, for example.
US Climate Package: An incentive for domestic production?
Earnings season and the surprise announcement of Senate Majority Leader Chuck Schumer and Senator Joe Manchin, DWV’s agreement on new climate finance, rocked solar stocks after a period of lackluster performance. The Invesco Solar ETF is up 16% from last month and is now in the green for 2022.
If the package is passed, Fire said, the market will bring some much-needed stability. The bill proposes extending the investment tax credit, which has been instrumental in the growth of the solar industry, for 10 years. The ITC’s last extension was in 2020, and it was due to begin stepping down at the end of this year.
The proposed bill, called the Inflation Reduction Act, seeks to stimulate domestic manufacturing. Fire said the incentives in the bill could make US manufacturing economically viable for the first time. The company currently has facilities in Mexico, China and elsewhere
Ultimately, he believes the outlook looks favorable going forward as Europe’s energy crisis and rising energy bills are driving consumers, businesses and utility companies to switch to solar power. “We live in a good age for companies like us,” he said.