SolarEdge Q3: Rangebound ahead of earnings, macro risks weigh in (NASDAQ:SEDG)

It’s the last peak week of the earnings season. John Butters, senior earnings analyst at FactSet, notes that 70% of S&P 500 companies beat earnings estimates, while 71% beat sales expectations. More big names are reporting this week. A foreign solar name, a 10% stake in the Invesco Solar ETF (TANNING), has seen a lot of stock price volatility lately, but it has also underperformed its peers. More dark days ahead for SolarEdge?

The last big week for S&P 500 earnings

SEDG: Underperformance of the TAN ETF YoY

According to Bank of America Global Research, SolarEdge Technologies (NASDAQ:SEDG) is a global leader in power electronics headquartered overseas. SEDG designs and sells semiconductor-based DC-optimized inverter and battery systems that include DC optimizers to regulate module-level output, a string inverter to convert DC to AC electricity, and a coupled battery DC to store electricity. SEDG sells its products to solar installers, EPCs and distributors worldwide, primarily focusing on North America and Europe.

The Israel-based semiconductor and semiconductor equipment company with a market capitalization of $12.5 billion in the information technology sector trades at a price-earnings ratio High GAAP of 85.8 over 12 months and does not pay a dividend, according to The Wall Street Journal.

The company faces headwinds from a weakening housing market, significant negative impacts on currency exposure, a somewhat weak execution track record and ongoing logistical challenges. Other downside risks include increased competition that could squeeze margins and political uncertainty. The upside potential comes from better execution, increased legislative support and lower interest rates in the market.

Looking at valuation, BofA analysts forecast strong earnings growth next year after a strong 2022. EPS growth should then remain high through 2024. Bloomberg consensus forecasts are roughly comparable to BofA’s outlook. Yet operating and GAAP P/E are very high and SEDG’s EV/EBITDA multiple is extremely rich while free cash flow is low.

A high earnings multiple and strong growth in earnings per share led me to check out the forward PEG ratio. Currently, it is only 1.34 – below its 5-year average, according to Seeking Alpha. So the assessment seems fair to me here.

SolarEdge: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate events data provided by Wall Street Horizon shows a confirmed Q3 2022 earnings date of Monday, Nov. 7 AMC with a conference call immediately following the earnings report. You can listen live here.

The volatility catalysts don’t stop there, however. The SolarEdge management team is expected to present to the Credit Suisse 26e Annual Technology Conference from November 28 to December 1. There are also two more talks to come. These events sometimes include new company and industry information.

Corporate events calendar

The angle of options

Digging into the earnings report, data from Option Research & Technology Services (ORATS) shows an implied stock price move after earnings of 10.3% using the nearest parity straddle. This is well below the huge 19% odds of SEDG shares after its August report.

Also note how poor its EPS beat rate history is – SEDG has missed its earnings estimates in 6 of the last 7 reports. Overall, given the strong swings after some recent earnings reports, the implied move of more than 10% looks about right in terms of premium pricing.

SEDG: 10% change in share price linked to earnings

The technical grip

Revisit the SEDG chart, the same general trading range persists. In July, I recommended watching $200 for support and the $375-$390 range for resistance. That generally held, although the stock fell to $190 – slightly below its 2021 and 2022 lows last month. We must continue to wait for the definitive signs of a break in the rating range, now two years old. I would buy shares at around $200 and sell them at around $350.

This time, however, there might be resistance from near $265. Notice how the volume by price indicator on the left shows a large number of shares traded up to $315.

Overall, if we see a decline in earnings near $200, I would buy stocks with a stop below $190. But the stock technically remains just a “hold”.

SEDG: Clearing Support and Resistance Zones

The essential

SolarEdge is expected to see some volatility after the earnings release on Monday evening. Its valuation seems fair, but significant macroeconomic and company-specific risks remain. Moreover, the technical picture just displays a choppy range with no trend and no momentum. I continue to have a hold on this company.