2020 was a positive year in the US capital market, with many stocks giving double-digit and even triple-digit returns. The trend included a several Israeli companies traded on Wall Street - the biggest of which was SolarEdge Technologies, which started 2020 at a market cap of $4.5 billion, jumped by 236%, and ended the year on a market cap of over $16 billion, passing giants like Teva, Amdocs and Wix on the way up.
The momentum continued in the first week of 2021, with the company benefiting from positive sentiment amid expectations that the Democrat-led administration will promote green energy. The stock particularly responded when word came in that the Democratic Party had won the Georgia Senate election, which is expected to ease the Biden administration's ability to promote eco-initiatives. And so, with an almost $18 billion market cap, SolarEdge has become the most highly valued Israeli company on Wall Street, and overall, overtaking Check Point, NICE Systems and NovoCure, as well.
Nonetheless, the company's veteran CFO, Ronen Faier, believes the company can aim higher: "They say that if a company does well, then the stock follows suit. As long as we carry out our plans, I assume our share price will follow and continue to rise," he says.
SolarEdge manufactures technological systems for monitoring and optimizing solar energy. In recent years, through acquisitions, it has expanded its operations to related areas as well. The company was founded and managed until 2019 by the late Guy Sella, who retired due to his illness and died shortly thereafter. Today, the company's CEO is Zvi Lando.
In the first three quarters of 2020, in the shadow of the Covid-19 pandemic, there was a slowdown in the company's revenue growth; after growth of almost 50% in the same period in 2019, growth amounted to a more modest 9.3%, to $1.1 billion in revenue. Net profit attributable to shareholders (non-GAAP) grew by 15.7%, a rate similar to that of 2019, and totaled $169 million.
If not for the coronavirus, would 2020 have been the best year for SolarEdge since it was founded?
Faier: "I think so, but to clarify: the real question is how a company measures itself. There's a certain dissonance between success as measured by the share price - it's always gratifying when it goes up because it's good for the investing public, whom we, as management, work for - and success in business.
"For our stock, it was undoubtedly our best year. In terms of business, and according to our forecast, 2020 merges as fairly similar to the previous year. On the business side, the situation is good - this being the year of Covid-19 - and we believe we increased our share in markets outside the US. In the US, where the solar market declined, we assume we've held our place, so that we are positioned no worse than last year. But for us, by definition, a year without growth is not such a successful year."
Where will future growth for SolarEdge come from? "We want to build a large company in energy conversion technology - which is a larger sector than solar inverters," says Faier. "Guy [Sela], of blessed memory, would say that we're not a solar company, we're a company that knows how to manage energy. We began with solar, then got into all kinds of places. Today, we're beginning to see the results from that expansion."
Even before that, the company sees different direction of growth within the solar sector. "Since 2018, we have been the largest inverter company in the world in terms of revenue," says Faier. This sector divides into three parts: home installations, the commercial market, and utilities (the largest installations). SolarEdge's product is not unique to the utilities market but is already installed in several locations, and the company believes it will grow nicely in this market with a dedicated product to be launched at the end of the year.
On the geographic level, Faier estimates that SolarEdge will be able to increase its stake in the US, where the company has an over 50% share of residential installations, but only 15-19% of the commercial segment. In Europe, its market share is 15-40% (depending on the country) and up to 15% in Asia. In both of the latter cases, Faier believes "There is room to gain market share and grow".
Next: Home energy management systems
When you talk about gaining market share, what are you competing over? Price?
"Price, too, but actually, it's mainly the technological road map. I'll talk a bit about our history and why we're interesting: up until 2013, installing a rooftop solar system wasn't worthwhile for homeowners because the installation was costlier than buying electric power from the grid. So, it was only for 'tree-huggers' or in places where that was subsidized.
"As in all cases where technology comes in and gets better, in 2013 a situation arose in Western countries that made it cheaper to install a solar power system than to buy power from the electric company. At that point, the power companies had a problem: about two-thirds of their costs come from transmission and distribution. So, the power companies say, 'I can pay you if it's cheaper, but who will pay for the grid?'
"Two scenarios have formed. In Germany, for example, solar system users are forbidden from selling electricity to the power company grid; whatever isn't used is thrown away. In the US and elsewhere, prices are set according to the time of day: buy electricity cheaply in the afternoon, and sell it at a higher price at night. And it's still very cost-effective to install a system."
"The price gap between buying and selling is growing. This problem can be solved through storage: a battery that stores electricity and can be used at night, or through self-use : when no one is at home, electricity cab be used to heat water, dry laundry, run the dishwasher, using software together with a solar inverter that knows how to harvest energy and direct it to the right areas in the house, as well as storing it in the battery. These days, inverters on their own aren't interesting - SolarEdge is heading in the direction of power management systems.
"So yes, competition is always about price, but with a relatively small price difference, we provide a technological road map as well. The technology creates a premium, but we have to justify it."
Another technological solution aligns with power company needs, enabling SolarEdge to offer stored solar-generated energy during peak consumption periods.
Recent acquisitions contribute to growth
Beyond the solar market, three acquisitions made by the company in recent years have added new growth engines. They are Kokam (Korea), Gamatronic Electronic Industries (Israel), and SMRE (Italy). "Kokam manufactures batteries," explains Faier. "One of the problems in the marketplace is that there aren't enough batteries to satisfy solar system demands, because most battery manufacturers are focused on the electric car market - anything else is considered peripheral. We identified batteries as a key component and want to be masters of our own fate. We've stated that, in 2022, we'll have an additional $300 million revenue and $500 million in 2023. Kokam's stand-alone business activity can also grow. Probably, we won't be competing with the big players but there is a whole world of battery users out there: ferries, trains."
Gamatronic's operations were acquired for NIS 41 million. "The uninterruptible power supply (UPS) market is larger than the solar market, over $9 billion," says Faier. "There's been almost no innovation in recent years, and the products are similar to solar ones. I believe that, on the basis of Gamatronic's infrastructure, we can disrupt the market, because we can make smaller, more efficient systems. A data center, for example, cannot have a crashed computer that takes 10 minutes for rebooting. You need many UPS units in a small area that don't emit heat. This is a big market. It will take time, but there we've got a lot of marathon runners at SolarEdge - we're patient and we're used to suffering."
The Italian acquisition has put SolarEdge into one of today's hottest markets: electric cars. "An electric car engine is a combination of a battery, a battery management system and an inverter, and a few other elements," says Faier. "This is an amazing opportunity, because most engine manufacturers don't make the whole propulsion unit from end to end. The company we acquired can sell a complete system, and that gives us the advantage of producing a cheaper system. We already have a project with a major automotive player, in which we're producing systems for 100-200 vehicles for pre-production testing. If we get the project, SolarEdge will actually enter a very exclusive club of suppliers to the automotive industry, and this is a very interesting market. It's already certain that the electric vehicle market will grow fast in the coming years."
How much will it grow?
"We're examining the delivery vehicle market. It is a generic, very interesting market, because - at least in European cities - there will be bans on fossil fuel vehicles entering city centers due to pollution, while delivery vans must enter. By 2030, there will be about 2 million such vehicles. Now, suppose a propulsion system costs 25-40 thousand euros - prices will keep going down - the question is, what will SolarEdge's share be. Any number is very interesting.
"We don't know how to estimate the potential at the moment, but we should remember that this is also just one market segment. There are more, like electric two-wheel vehicles. In any case, to wrap up the whole story: we lead the solar market but we still have room to grow, battery market growth will parallel solar, the UPS market will grow, and everyone's a winner in the automotive market - and we're in them all."
Are there other markets you plan to enter?
"I'm not sure I can point to anything specific, but what will characterize any market we enter is that it will be a market we understand, where we can make a real change, and that it's not a market that's become a commodity."
You recently raised $618 million by issuing zero-coupon convertible bonds. What's the plan?
"The money we raised was definitely intended for acquisitions; there's nothing concrete on our radar. Up until 2018, we made no acquisitions. Then, within eight months, we made three, and since then many companies have come knocking on our door. We're selective, because the odds are usually against the buyer. We won't bite off more than we can chew. "
"There's always a chance we might be acquired "
Let's go back for a moment to your sharp rise in market cap in 2020. Today, your traded at a p/e ratio of 86 on projected earnings for 2020 and 75 for 2021. Is the market crazy, or is this a multiplier you can explain?
Faier laughs: "Both. The markets are where they are, it's undeniable that the stock markets are at all-time highs, but at the end of the day, without commenting on the multiplier itself - the market is forward-looking and looking at potential. We're a company whose profit potential certainly justifies these valuations. Whether it will happen in a year or more - I'm not sure I want to answer because I really don't know. But our focus is on the bottom line, and net earnings per share translates into value. People joke about how important profitability is to us - there's a whole world of companies willing to take a loss in order to sell more - but Zivi [Zvi Lando, the CEO] and management aim to achieve high enough earnings per share to justify our high market capitalization."
Nonetheless, your competitor Enphase Energy, which had a lower market cap than yours a year ago, is currently traded higher after shooting up 572% in 2020, and the market awards their share a more generous multiplier. Why?
"I also ask myself why that is, and I'll try to explain. First of all, their management does a great job: they're super-aggressive and very efficient, and have a good product - I think we're a little better, but I'm biased. The interesting point is that Enphase is very US-centric. In the US, there's a safety regulation stipulating that to prevent electric shock, every panel must be equipped with a switch that shuts down the system. We and Enphase know how to do this, so a de facto duopoly has been created. Enphase focuses mainly on home installations, not large ones, in the US. Most Americans are not interested in what is happening beyond the North American continent, and there are no public companies active in the commercial market with which SolarEdge can be compared. In the US domestic market, Enphase has grown faster than SolarEdge, and that's what Wall Street loves - even if the other company makes more money and sells more. The competition with Enphase is annoying at times, but it's good for us."
Is there a chance that SolarEdge will be acquired?
"There's always a chance because, as a public company, the shareholders may approve it and we work for them. But we want to be a big independent company and continue to grow, and we have the ability. We're a company that can convert energy in almost any form and application, and as the world population grows, access to energy will increase, and renewable energy will take up a larger share. So, we're in the right market and in the right place in the market. "
How will Joe Biden's election to the US presidency affect you?
"Firstly, President Trump recently signed a benefits package that included extending the tax benefit for installing solar energy systems. This will make the market less volatile. Biden is an important piece, but we're not just looking at growth in the US, and there is a global trend that's penetrating regions where we are located."
The new factory in Tziporit: "Children on school trips will come and learn about green energy, Guy and his legacy."
SolarEdge's headquarters are located in Herzliya, but the company is expanding operations in Israel - both at new offices in Modi'in and at a new plant in the Tziporit industrial zone in northern Israel, where it has established its first manufacturing plant.
"The decision to set up a factory came from the approach led by Guy," says Ronen, referring to SolarEdge co-founder Guy Sella, who ran the company until his final days and died in 2019 at the age of 55 after a battle with cancer. "Today we work with subcontractors in China and Vietnam, and are involved in production. There's an inherent problem in working with subcontractors: their profit is derived as a percentage above the cost of materials, and when I want to discount prices, I'm working against the manufacturer. We decided that the best way is to automate more - lower the number of people on the production line and increase product quality.
"The vision was to set up the plant in Israel and replicate it in the rest of the world. We are very proud of this plant. For me, driving along the road and seeing our sign is fun. All our warehouses are automated and there's a rooftop solar system. This is Zionism. It also brings us, technologically, to a level of production met by very few other companies. The plan is to establish a visitor center, and the dream is that children on school trips will come and learn about green energy, about Guy and his legacy."
During that he ran the company, Sella, who died at age 55, led it to an IPO on Nasdaq, and to acquisitions. "Today is my tenth year at the company," says Faier. "Before that, I was also at tech companies: VocalTec and M-Systems, after which I moved to Modu with Dov Moran. I had the honor of working with him and learned a lot from him. After Modu closed, I met Guy. Even before that, I used to think that green energy was the right thing to do and that it was possible to grow in this field. And then, I met a man it was impossible not to work with."
Published by Globes, Israel business news - en.globes.co.il - on January 13, 2021
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