What happened
Shares of SolarEdge Technologies (SEDG +0.40%) are up 12.5% in early afternoon trading on Feb. 19 following two pieces of positive -- at least indirectly -- news for the company. First up, SolarEdge peer Enphase Energy (ENPH 4.05%) reported its fourth-quarter results, beating the top end of the company's own guidance for the quarter and full-year 2020.
So what
Let's start with Enphase's earnings report. Enphase -- which, like SolarEdge, makes power components that connect solar panels to the electrical grid -- reported revenue of $624 million in 2019, almost double its sales from the year before. Gross profit more than doubled to $221 million, and the company generated $139 million in operating cash, up an astounding 762% year over year.
Image source: Getty Images.
In addition to reporting a strong finish to 2019 that made it the company's best year ever by far, Enphase's management said on the earnings call that, "While we remain cautious and are watching the impact of the virus carefully, we do not see a big impact to the first-quarter revenue guidance at this point." Management also highlighted the status of its new manufacturing facility in Mexico, which is producing on schedule and expected to be producing 1 million microinverters quarterly by the fourth quarter of this year.
In addition to Enphase's earnings, which bode well for SolarEdge (which benefits from the same catalysts as Enphase), a noted analyst raised his price target for SolarEdge in a note to investors. In the note, Eric Ross of Cascend Securities increased his target for SolarEdge shares to $140, pointing to the company's strong position in solar-power electronics and its move into energy-storage systems.
Now what
SolarEdge and Enphase are profiting handsomely from their status as essentially a duopoly in supplying power electronics to the U.S. residential solar market, and investors clearly expect SolarEdge will follow Enphase's strong fourth quarter with one of its own when it reports soon. However, there's another likely reason behind today's big price jump for both stocks: Short-sellers are buying shares to cover their short positions.
Late in 2019, noted short-seller Citron Research released a report predicting that the two companies were set to be disrupted and their stocks would fall 45% and 81%, respectively, in value. Since that report was issued, short interest in the two companies exploded, but both continued delivering strong growth, and short-sellers have experienced huge losses with Enphase stock up 152% and SolarEdge up 85% since.
Draw a line from that and arrive at Enphase's incredibly strong results and it's not a far-fetched conclusion that a significant amount of today's buying was from short-sellers trying to exit their positions and cut their losses.
What does this tell us about the future for SolarEdge stock? Honestly, not much beyond the likelihood that it will continue to be a very volatile stock. It's also trading at a nosebleed-inducing valuation by pretty much any metric, which means that shares could fall sharply on anything less than expectations-beating results.
But looking at its prospects with a long-term view, it still remains a key supplier in a massive global growth market. Management also is smartly diversifying the business across other growth opportunities, like energy storage and electric-vehicle powertrain components.
It's going to be bumpy, but SolarEdge is positioned to remain a leader in the renewable energy industry for many years to come.
