SolarEdge enters 2019 as much more than an inverter company.
After seizing a lead in rooftop solar power electronics, the publicly traded company embarked on a series of acquisitions that expanded its footprint into new markets.
SolarEdge coupled that expansion with organic growth: It delivered 1.1 gigawatts-AC for a record revenue of $263.7 million in Q4, according to the earnings data released Wednesday. Annual revenue reached $937.2 million, just shy of $1 billion and up 54 percent compared to the year before.
Internally, SolarEdge is expanding into larger-scale inverters, and adding new product lines like connected home energy appliances, including EV charging. It has also launched a grid services offering to help third-party aggregators turn installed solar systems into controllable assets.
Almost all revenue still comes from solar inverters; the new acquisitions showed up as a cost center this year, weakening margins and earnings per share. But they open up several avenues for business expansion into growing markets like battery storage and electric vehicles.
In the last year, SolarEdge took control of uninterruptible power source company Gamatronic, South Korean battery manufacturer Kokam and Italian electric vehicle drivetrain firm SMRE. The latter deal closed in January, with SolarEdge buying a 57 percent stake for $85 million and planning to pick up the remaining shares over time.
The expansion into new markets insulates SolarEdge against competition in the solar inverter space. The challenge will be turning the buying spree into a coherent business rather than a distraction from the main affair.
“Macro-wise, we are becoming more and more a smart energy provider and less a pure-play inverter provider, but we are still super committed to providing state-of-the-art inverters and solutions to the market,” said Lior Handelsman, founder and VP of marketing and product strategy, in a December interview.
Solar companies growing through acquisition must confront the long shadow of SunEdison, the would-be solar supermajor that collapsed under the weight of its massive debt. SolarEdge has a simple antidote to ward off that malady: paying in cash.
“We are very far from where SunEdison was in terms of a company that had billions of dollars of debt, heavily leveraged,” Handelsman said.
Even after dropping $101.2 million for Kokam, SolarEdge ended the year with $392.2 million in cash on hand, enough to make further purchases a distinct possibility.
Electric vehicle expansion
The SMRE acquisition built on the similarity between electric drivetrains and the power conversion SolarEdge does for solar systems. SolarEdge had already made forays into EV charging products.
"By having this automotive arm, we now have a bigger market to access: not just the solar market but the electric vehicle market," Handelsman said in a February interview.
The acquired company stands to benefit from SolarEdge's supply chain and buying power, he added.
That supply chain now includes in-house cell manufacturing from Kokam, which could supply the battery packs SMRE makes for electric drivetrains. This is akin to the arrangement whereby Panasonic supplies cells for Tesla's battery packs, but with unified ownership.
Kokam produces high-grade batteries, but even with more than 900 megawatt-hours of lithium-ion cell manufacturing globally, it lacks the scale of heavyweights like LG Chem and Samsung.
"We can provide the capital and some of the market access, and Kokam can provide us with the ability to diversify and sell better energy storage systems and reduce our dependency in other storage lithium-ion companies," Handelsman said.
That could prove especially valuable given that cells have been in short supply, pushing back project deliveries for the storage industry.
Batteries are penetrating the home solar market, so the Kokam relationship can fuel SolarEdge's core product. But it also opens up a line to the grid-scale storage market, where the inverter company did not have a presence. Late last year, Kokam announced it will supply 40 megawatt-hours of batteries to the South Korean grid.
Longer-term, the business lines could well merge. EV charging requires far more power than a typical home uses, and the car itself constitutes a grid storage device. The ability to control charging alongside stationary storage and solar creates potential value for SolarEdge's grid services offering.
That said, the new businesses will take time to return meaningful profits to the overall company. Inverters will dominate revenue for the next few years, Handelsman noted.
"Smoke but no fire"
SolarEdge prides itself on delivering higher value and avoiding the race to the bottom on price. Still, the inverter market, like the solar hardware market in general, is at risk of commoditization.
It will be hard for the industry to sustain 6 to 10 percent year-over-year cost declines forever, said Ben Gallagher, senior analyst at Wood Mackenzie Power & Renewables. Diversification creates an alternative path for growth if inverter margins tighten up.
"If their entire business is focused on trying to squeeze out other companies in the residential and small commercial PV inverter market, there’s not as much upside as trying to become this larger energy services provider," Gallagher said.
For now, though, SolarEdge holds a dominant lead in the U.S. residential PV market and continues to take share from its competition, Gallagher noted.
Wall Street analysts have spent the last few years worrying about what would happen to SolarEdge stock, currently trading at around $43, when Chinese telecom giant Huawei launched its residential inverter in the U.S.
Huawei's aggressive pricing and sales tactics have pushed down inverter prices elsewhere in the world, but the game-changing U.S. arrival keeps failing to materialize. The company's reputation in the U.S. has slipped lately due to security concerns, further hindering its adoption.
"Huawei’s residential product is really appealing, but right now there’s mostly been smoke but no fire," Gallagher said. "With all of the geopolitical stress around Huawei’s involvement with the Chinese government, that could delay any additional gains in the U.S. market."
With that major competitor at bay for the foreseeable future, SolarEdge has some breathing room to plot its new strategic course.