On Wednesday, Canaccord Genuity (TSX:CF) updated its outlook on SolarEdge Technologies (NASDAQ:SEDG), increasing the price target to $16.00 from the previous $14.50, while keeping a Hold rating on the stock. The firm's analyst noted the change reflects a positive view of the company's recent strategic decisions, particularly its focus on financial stability and its core solar business.
SolarEdge's management has shifted its efforts towards the primary solar operations, which has been well-received by the market. The Energy Storage business, which contributed approximately 5.9% of the company's total year-to-date revenues and only about 2% in 2023 year-to-date, was identified as a drag on gross margins. This segment reported negative 58% gross margins for the first nine months of 2023, in stark contrast to the Solar segment's positive 32% gross margins.
The decision to divest from the Energy Storage segment aligns with previous hints from management about potential business divestitures during the third-quarter earnings call of 2024 as part of cost reduction initiatives. Since the Energy Storage segment has not been profitable since 2021, its divestiture is seen as a strategic move to cut the company's expenses.
Canaccord Genuity anticipates that the approximately $30 million in annualized operational expense savings will aid in SolarEdge's recovery, especially as demand for solar inverter and home battery installations is expected to rise in Europe and the United States. However, the firm also cautions that there could be further downward revisions to estimates if changes to the Inflation Reduction Act (IRA) occur during the fiscal year 2026 budget reconciliation, potentially affecting revenues starting January 1, 2026, once passed by Congress.
The firm has adjusted its financial model to account for expected charges in the fourth quarter of 2024 and the first half of 2025, along with the predicted cost savings to follow. The new price target of $16.00 is based on an 11.1 times earnings per share (EPS) multiple applied to the firm's 2026 EPS estimate of $1.44.
In other recent news, SolarEdge Technologies has made significant strategic decisions, including halting its battery manufacturing operations, a move seen by Oppenheimer as a bid to stabilize the company's financial position. The company is expected to incur an asset impairment charge between $81 million and $99 million, with the assets in Korea considered for sale. This move could potentially recover some of SolarEdge's cash investment. As a result of these developments, several analyst firms have adjusted their ratings for SolarEdge.
Guggenheim upgraded its rating from Sell to Neutral, while Barclays (LON:BARC) maintained an Underweight rating but reduced its price target for SolarEdge to $7 due to concerns about future cash burn and competitive position. Morgan Stanley (NYSE:MS) downgraded the company's rating from Equalweight to Underweight and reduced the price target to $9, and Goldman Sachs (NYSE:GS) increased its price target for SolarEdge to $28, maintaining a Neutral stance.
In addition, SolarEdge has announced a collaborative agreement with Novartis (SIX:NOVN) for research and expanded software utilization, and is advancing its proprietary pipeline with several milestones anticipated in fiscal year 2025 for multiple drug candidates targeting various cancers and solid tumors.
InvestingPro Insights
Recent InvestingPro data and tips provide additional context to SolarEdge's current situation and Canaccord Genuity's updated outlook. The company's market cap stands at $840.28 million, reflecting the significant challenges it faces. An InvestingPro Tip highlights that SolarEdge has been "quickly burning through cash," which aligns with the company's strategic shift to focus on financial stability and its core solar business.
The decision to divest the Energy Storage segment appears prudent in light of another InvestingPro Tip indicating that SolarEdge "suffers from weak gross profit margins." This is evident in the reported negative gross profit margin of -69.33% for the last twelve months. The company's revenue has also seen a sharp decline, with a -70.52% growth rate in the same period, underscoring the need for strategic realignment.
While Canaccord Genuity has raised its price target, investors should note that SolarEdge's stock price has fallen significantly over the last year, as pointed out by another InvestingPro Tip. This volatility is reflected in the 1-year price total return of -82.18%.
For a more comprehensive analysis, InvestingPro offers 18 additional tips for SolarEdge, providing investors with a deeper understanding of the company's financial health and market position.
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