Does SEDG stock have the steam to keep going? Could JKS stock present a better opportunity?
- WinInStocks
- Jul 22, 2020
- 5 min read
Updated: Nov 17, 2020
I originally alerted about Solaredge SEDG stock on February 13, 2020, at the price of $111.86.
The previous analysis can be found here: https://www.wininstocks.com/post/solaredge-technologies-inc-sedg-stock-analysis
Today, the stock trades at ~$176, which is a solid 57% growth. All this growth happened during COVID meltdown, which is even greater.
I also analyzed briefly JinkoSolar (JKS stock) as part of top undervalued stocks on February 13, 2020: https://www.wininstocks.com/post/top-15-most-undervalued-stocks-of-2020-based-on-peg-score-analysis
At the time of analysis, JKS stock was priced at $25.50. The price currently stands at $20.33. However, JKS stock recently started to move.
The question is: does SEDG stock still represent good BUY opportunity at its current price.
What is causing movement in JKS stock? Will it continue to grow? Does it represent a better opportunity than SEDG stock?
First, let’s go by the book rule: “let your profits run.” SEDG stock is currently sailing in the uncharted territory and has recently broken through the previous high level. If you bought it before, I would hold it until it gives a sell signal by crossing an already established support level.
But, let’s look at financials. In the previous analysis from Feb 13th, I said the PEG for SEDG stock was 2.17 with a PE of 52 and expected EPS growth of 24%.
Solaredge finished 2019 better than was expected. In 2020 its EPS is expected to decline a bit due to COVID. After that, the growth is expected to resume.
Earnings for SEDG stock are now expected to grow at 30% per year. At the current price and expected EPS, SEDG P/E ratio currently stands at 61. However, forward PE for 2021 already reduces to 40. Both are a bit high, so let’s see if expected earnings growth warrants such a high PE score. The Price-to-Earnings-Growth score for 2021 is 1.34 (40 divided by 30%). The PEG will further decline to 0.99 which is quite good. However, this would hold true if the company will grow at 30% for at least 5 years after 2022.
Can Solaredge do this? Is there enough room to grow sales consistently at 30% for a company that already has revenue of $1.4 billion? The company has ambitious plans to better diversify its business into commercial and utility businesses. Currently, it is underdeveloped in both as its key market is residential use of inverters.
Solar Energy Market Size to Grow $223.3 Billion, Globally, by 2026
Solaredge plays in 3 product categories: Inverters, Storage & Energy Management, and Smart Modules. It plans to better diversify its product portfolio in the future.
The global inverter market is projected to grow from USD 12.8 billion in 2020 to USD 26.5 billion by 2025. It is expected to grow at a CAGR of 15.6% from 2020 to 2025.
The energy management systems market size stood at USD 18.3 billion in 2018 and is projected to reach USD 48.9 billion by the end of 2026, thereby exhibiting a CAGR of 13.7% during the forecast period.
Solar PV Module Market size exceeded USD 35 billion in 2019 and is expected to grow to USD 54 billion in 2026. This represents CAGR of 8.5%.
In total, the 3 segments that SEDG plays are expected to grow from $66 billion to $133 billion in 2026, representing a CAGR of 13-14%. Just to remind, SEDG revenues currently stand at $1.4 billion which is just over 2% of the current market size.
As you can see below, Solaredge is planning to grow its revenues by targeting the markets where it is currently not developed well: Europe and the Rest of the World.
If we believe in SEDG management and its innovation and expect it to take 5% of the market by 2026 this would mean its revenues will increase to $6.65 billion which would mean it will be growing sales at ~26% per year.
So, yes, there is room for growth and SEDG can do it if you trust their management.
The stock price is a bit overpriced at the current price and EPS, but it seems that the company will catch up on the price with EPS quickly (by the end of 2021 – mid 2022). If I did not own the stock right now, I would probably buy it even at the current price with plans to hold it until at least the end of 2022.
Moving on to JinkoSolar Holding Co., Ltd (JKS stock).
There was a lot of news for JKS stock recently.
1. The company first came out with great news on innovation as it JinkoSolar launched 580-W solar panel for the utility-scale market. This is 40% higher than the current mainstream 72-cell module.
2. Then it announced that the maximum solar conversion efficiency of its large-area N-type monocrystalline silicon solar cells reached 24.79%, and have set a world record for large-size contact-passivated solar cells.
3. Then, JinkoSolar to Supply Over 300 Modules for Chile's Solar Park.
Almost too good to be true.
On the other hand, JinkoSolar had long patent litigation with Hanwha Q CELLS. Recently the German court ruled in favor of Hanwha Q CELLS. On the other hand, the U.S. International Trade Commission has determined that JinkoSolar’s products do not infringe any patent claimed by Hanwha Q-Cells.
However, the article also mentions that these modules are not even in production anymore.
Let’s look at JKS stock value and growth forecasts.
Value: JKS stock has extremely good value with a current PE ratio of 5.9. There are likely 3 factors attributing to this:
1. Patent Litigation Hanwha Q CELLS which is just starting to get resolved (as you can see below with mixed results).
2. Predictions of negative growth in sales and negative EPS. I believe these predictions will be changing soon as JKS resolves patent litigation, analysts start to realize JKS has breakthrough innovation, and as we can see overall solar energy market will be growing in the next few years.
3. JKS stock recently been underperforming on EPS vs. expectations which is partially due to increased COGS (Cost of Goods Sold) which reduced their Gross Margin, ultimately reducing profit margins.
Here is the chart showing future expected EPS for JKS stock as per https://simplywall.st/stocks/us/semiconductors/nyse-jks/jinkosolar-holding#future
On the other hand, Zack’s predicts EPS growth for JKS stock with the following predictions:
This represents average annual growth of 33%.
Under these predictions, the PEG ratio (Price-to-Earnings Growth) for JKS stock is 5.9/30 = 0.19, where everything below 1 is very good.
On another positive note, is that institutional investors seem to be accumulating JKS stock with increased positions double vs. decreased positions.
To summarize, both SEDG stock and JKS stock present good opportunities for investment. However, with SEDG stock there is more stability, but you have to pay premium for that stability. For JKS stock there are a few unknowns, but the valuation for the stock is very attractive. If JKS is able to boost its share of the market and grow sales/profits we may see the stock price easily multiply.
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