Caught in a Perfect Storm

1 July, 2024

SolarEdge's revenues collapsed. Stock market down. One of its customers filed for bankruptcy. "The company grew too fast." Plans to raise $300 million to finance repayment of 2020 bonds

SolarEdge Technologies announced last week its intention to raise approximately $300 million by issuing convertible bonds to be offered to institutional investors. The bonds (not yet priced) are due in five years, on July 1, 2029. Underwriters will be given an option to purchase additional bonds worth $45 million. The current move stems from the company’s cash flow difficulties, which turned negative due to the downturn in the solar market. In fact, the current debt issuance is a kind of “debt refinancing” intended to increase its “cash cushion” ahead of the expected repayment of the company’s bonds worth $550 million. SolarEdge issued these in September 2020 and must repay them in September 2025.

In response to the announcement published after the NASDAQ close, SolarEdge’s stock is plummeting by more than 17% in pre-market trading, after losing about 86.5% of its value in the last 12 months. Another worrying sign of the negative business environment was received last weel, when the company reported to the SEC that one of its customers, PM&M Electric from Arizona, which provides solar panel installation services, has declared bankruptcy. The company owes SolarEdge $11.4 million.

Losing Money on Every Sale

SolarEdge’s Q1 2024 report, published a few weeks ago, illustrates its business and cash flow challenges. Along with a 79% decrease in revenue, the company recorded a GAAP net loss of $157.2 million. Its cash reserves shrank from $634.7 million at the end of Q4 2023 to just $316.3 million at the end of Q1. It also reported that its gross margin on sales in the solar market is negative: minus 3.5%, compared to a positive margin of 35% last year. This figure means that SolarEdge incurs a loss on every product it sells.

In a conversation with Techtime, Sergey Vastchenok, a senior analyst at Oppenheimer Israel, explained that the debt issuance announcement reflects a pessimistic forecast from the company, at least in the near term. “Due to its heavy expense structure, SolarEdge is burning a lot of cash, almost a billion dollars in the last year. The fundraising indicates that the company is not optimistic about a recovery later this year, and therefore it is raising capital to have a ‘cash cushion’ for repayment of previous bonds.”

Collapse of the Concept

Regarding the factors that brought it to this situation, Vastchenok says: “Many tend to attribute this to high interest rates, but in my opinion, this is a secondary factor. In the U.S. market, there is disappointment with Biden’s incentive program for renewable energy, which has only partially materialized, and in certain states, they have begun to impose restrictions on the amount of electricity that can be sold from solar panels. In Europe, the company’s main target market, electricity prices that were remarkably high at the beginning of the war in Ukraine and drove solar demand, have returned to normal levels. Also, in the European Parliament elections, the Green parties lost significant power. There is also increasing competition from Chinese players entering the market. This is truly a ‘perfect storm’ for SolarEdge.”

In his view, management led a flawed concept that collapsed in the past year. “SolarEdge grew too fast, and they did not properly assess potential risks. Throughout the solar market value chain, there was a phenomenon of inventory build-up that got out of control. The company built itself for sales of $5 billion, which was reflected in establishing factories, global expansion, commitments to subcontractors, and a too wide range of products. The faster you grow, the less efficient you are. When the market suddenly crashed, the company found itself with an unsuitable operational structure, which will take time to fix. SolarEdge is the last link in the food chain of the solar market – and it failed to anticipate the market downturn.”

Despite the plunge in the company’s value, Vastchenok does not believe that there will be a factor that will take advantage of the situation to promote a takeover of the company. “There is no incentive for such a move. Such takeovers occur in companies with lots of cash, good business conditions, and room for efficiency. This is not the case with SolarEdge. The recovery and efficiency process will take a long time and will be challenging.”

The background

The background to what is happening in the market is the sales crisis: SolarEdge closed the first half of 2023 with record revenues of $1.93 billion – and then the picture turned completely up side down: in Q3 the company reported a 27% decrease in revenues, and in Q4 it reported a 65% decrease in sales compared to Q4 2022, to about $316 million. The decline continued: in Q1 2024, sales totaled about $204 million – a 78% decrease compared to Q1 2023. Solaredge attributed the declines to inventory accumulation among its customers in Europe (responsible for more than half of revenues), and a general decline in the solar market.

Investors’ reaction to the stock exchange was extreme and persistent: at the beginning of 2023, the company’s stock was trading on NASDAQ at about $300. In March 2023, the collapse began, bringing the stock within about three months to a price of $70. Since then, the decline has continued at a more moderate but steady pace, and today it is trading at about $34 – almost a tenth of its price in February 2023.

Short-selling Attack

A Techtime enquiry revealed that the significant declines in SolarEdge’s stock are likely also related to a short-selling attack that the company is dealing with, which is being carried out with almost unprecedented intensity and volume in the technology industry. In these transactions, investors bet that the stock price will fall: they borrow a stock at a certain price, and upon closing the transaction, they return a stock to the lender – meaning they buy it at its market price. If the stock price falls, they profit; if it rises, they lose.

According to data from Benzinga, which centralizes information on short-selling transactions, about 23.4% of transactions in SolarEdge stock are short-selling transactions. This is a considerable percentage: the short-selling rate at SolarEdge’s main competitor, Enphase, which deals with the same market phenomena, is only about 13.3%, and even this is an exceptionally substantial percentage.

When comparing it to technology companies in other markets, the problem becomes apparent in its full extent: Intel’s short-selling rate is 2.19%, Nvidia’s is 0.12%, and Tesla’s is 3.65%. Even a company like Innoviz, another Israeli company that suffered a painful stock blow due to a misvaluation (during a capital raise), has a short-selling rate of only 8.07%. Moreover, at SolarEdge, this rate is on the rise: about a year and a half ago, it was only about 4.5%. Since then, it has been steadily and consistently rising, meaning there are buyers for the short-sold stocks returning to owners – and therefore the market is forcefully pushed to the bottom.

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Posted in: Electronics Industry , Energy & Environment , News

Posted in tags: SolarEdge