SolarEdge shares tumbled this week after the company’s second-quarter results showed a squeeze in margins from plant closures, higher transportation costs and negative currency effects from the weakening euro.
However, SolarEdge CFO Ronen Faier said lower margins are now the price to pay for long-term growth in a market where demand is skyrocketing.
“We have a demand that is way beyond anything we plan, expect and could even grow,” he told CNBC.
SolarEdge reported record second-quarter revenue of $727.8 million, just below the $730.7 million analysts polled by StreetAccount.
The company’s non-GAAP gross margin was 26.7% for the most recent quarter, compared to 33.9% for the same quarter last year. For the current quarter, the company expects a gross margin of between 26% and 29%.
Shares fell 19% on Wednesday as investors reacted to mild guidance. The stock gained some ground on Thursday and Friday but remains 10% lower over the week. Over the past month, however, the stock is up 17%.
Faier noted that about 47% of the company’s sales come from Europe, meaning the company is fairly exposed to the flagging euro. Additionally, a factory in China had to be temporarily closed during the country’s strict Covid lockdowns, halting production at a time when supply chains are already tight.
Finally, in an effort to fulfill orders on time, SolarEdge decided to ship some goods by air, which is 10 times more expensive than shipping by sea.
Company executives saw it as a smart, long-term business decision. In addition to fostering customer loyalty by meeting delivery schedules, this is a way to maintain market share in a highly competitive marketplace.
“The market doesn’t live in a vacuum,” Faier said, describing it as “a battle for market share.”
Europe: a key growth area
Growth in Europe is a big opportunity for solar companies as the bloc scrambles to break away from its reliance on Russian energy. With its REPowerEU plan, the European Union has presented plans for the rapid expansion of renewable energies. Germany alone is expected to triple its annual solar installation rate within two years, according to Faier, making the country larger than the US market.
With electricity prices rising to record levels in Europe, solar power is also a way for consumers to ease the burden of inflation.
“They want to be very strong in the markets that are poised for very nice growth in the future,” Faier said.
SolarEdge isn’t the only company looking to take advantage of Europe’s energy crisis. Competitor Enphase saw second-quarter sales jump 69% sequentially in Europe.
Enphase CEO Badri Kothandaraman said he believes the company’s international division will grow from 20% of company revenue today to around 50% in the next few years, mainly due to European expansion.
Access to a customer’s home is especially important as solar companies — including SolarEdge and Enphase — look to offer more products. In a whole-home electrification offering, the first product in the door might mean that the customer uses the same company for a backup battery system and an electric vehicle charger, for example.
US climate package: Catalyst for domestic production?
Earnings season and the surprise announcement that Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.V., have agreed on new climate finance have rocked solar stocks after a period of lackluster performance. The Invesco Solar ETF is up 16% over the past month and is now in the green for 2022.
Faier said if the package is passed, it will bring much-needed stability to the market. The bill proposes extending the investment tax credit, which has been instrumental in the growth of the solar industry, by 10 years. The ITC was last renewed in 2020 and should begin withdrawing later this year.
The proposed legislation, dubbed the Inflation Reduction Act, also aims to boost domestic manufacturing. Faier said the incentives in the bill could make manufacturing in the US economically viable for the first time. The company currently has facilities in Mexico, China and elsewhere
Ultimately, he sees a bright future ahead as Europe’s energy crisis and rising electricity bills prompt consumers, businesses and utilities to switch to solar power. “We live in a time that is good for companies like us,” he said.