SolarEdge responds to market challenges with a strategic 16% workforce cut

Navigating a challenging market, SolarEdge strategically restructures for resilience and growth, and prepares to leverage the next cycle upswing.

Bottom line

The restructuring at SolarEdge is seen as a strategically positive move, aimed at enhancing operational efficiency in a challenging market environment. This period of market slowdown is being utilized by the company to reduce operational expenses and improve cost-effectiveness.

Despite the current headwinds, we maintain a positive outlook on SolarEdge's long-term investment prospects. We anticipate a rebound in the residential solar market within the year as inventory levels normalize. Additionally, the potential for lower interest rates could serve as a further catalyst for market recovery.

What happened

SolarEdge Technologies has announced a significant reduction of its global workforce, amounting to approximately 900 employees or 16% of its total staff. This decision is part of a broader restructuring plan aimed at reducing operational costs. The move follows a similar restructuring by its main competitor, Enphase, last month, which also reduced its workforce by about 10% and ceased operations at manufacturing locations in Romania and Wisconsin. Further details about the financial implications of SolarEdge's restructuring plan are expected to be disclosed with their FY23 earnings release in February 2024.

Impact on our Investment Case

Strategic restructuring amid market challenges

We see SolarEdge's workforce reduction as a strategic response to the current market environment. This move is aimed at reducing operating expenses, making the company more agile and better positioned to navigate the near-term challenges in the solar industry.

Although 2023 saw record-high global solar demand, largely driven by China (as highlighted by our recent note), a detailed analysis of various end markets reveals specific weaknesses in the residential sector, especially in the U.S. and Europe. This is primarily due to high interest rates and an inventory issue. 

U.S. residential solar market slowdown

In the U.S., the residential solar market is experiencing a slowdown, largely attributed to the introduction of NEM 3.0 in California, and rising interest rates.

Wood Mackenzie forecasts a decline in U.S. residential installations in 2024 (by -12% in terms of capacity), with a steeper drop in California due to the increased payback period under NEM 3.0 (up from 5-7 years to 9 years). However, a rebound is expected for 2025 with installations' growth supported by factors like the kicking-in of investment tax credits adders under the Inflation Reduction Act (IRA), and potentially lower interest rates.

Europe's mixed market dynamics

The European market, where SolarEdge has a significant revenue exposure (>60%), presents a mixed scenario. Following a surge in demand at the start of the Russia-Ukraine war (driven by high electricity prices, fears of blackout, and energy independence needs), channel distributors built up significant inventory. The timing for inventory normalization remains uncertain but various inverter manufacturers have projected a 2-3 quarters period for this during their Q3 2023 earnings releases.

In Germany (SolarEdge's largest market in the E.U.), near-term demand remains robust with strong policy support such as the Renewable Energy Sources Act (EEG). The Netherlands, another key market, is facing demand challenges due to political changes and uncertainties in solar incentive schemes. This situation is likely to persist for some time as new negotiations and policies are established.

Across Europe, slower growth is expected in 2024, mainly due to higher interest rates and lower electricity prices (even if still higher than pre-energy crisis) with a payback period now extending to 5+ years (from 2-3 years in 2022).

Finally some guidelines from the IRA

On the policy front, it's important to note the recent developments in the U.S. about the IRA, particularly the Treasury Department's latest guidelines (released on December 15th) about the Section 45X, concerning advanced manufacturing tax credit. These guidelines clarified that SolarEdge would receive $0.11/w tax credit for its DC power optimizers and $0.065/w for its residential string-inverter, a detail previously uncertain. Although quantifying the exact financial impact of these credits is challenging (some estimates suggest around $340 million of tax credit from FY23-FY25), they are expected to positively influence SolarEdge's financial performance. SolarEdge's collaboration with Flex in Austin, Texas, to utilize these credits, demonstrates its strategic adaptability and alignment with favorable policy developments.

Our Takeaway

The past year has been a challenging period for the residential solar industry, and the near-term outlook remains daunting. However, a market bottom is closing in, though the exact timing is uncertain. Factors such as inventory normalization and potential lower interest rates could catalyze a recovery. The long-term investment thesis for residential solar remains strong, driven by the vast untapped market potential and the technological leadership of companies like SolarEdge.

Our Sustainable Future strategy maintains a 17% exposure to the solar industry, comprising approximately of 6% in the residential-scale segment and 11% in the more resilient utility-scale segment.



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