SolarEdge stock plunge: Bargain buy or falling knife?

SolarEdge Technologies (NASDAQ: SEDG) is making headlines today with two significant pieces of news that have sent shockwaves through the market.

The company announced plans for a private placement of $300 million in convertible senior notes, which will mature in 2029.

This move aims to fund capped call transactions, redeem part of their outstanding 0% convertible notes due in 2025, and support general corporate purposes.

However, the market reacted negatively, with the stock plunging more than 16% in pre-market trading following the announcement.

Adding to the turmoil, SolarEdge revealed that PM&M Electric, one of its customers, has filed for Chapter 7 bankruptcy. This development puts $11.4 million owed to SolarEdge at risk, raising concerns about future cash flow and collections.

Challenges in the European market

SolarEdge is not just grappling with these recent announcements; the company is also facing broader market challenges.

J.P. Morgan recently highlighted a “moribund” European residential solar market, marked by high inventory levels, low power pricing, and political uncertainties.

This sluggish demand in Europe has significantly impacted SolarEdge, given its substantial presence in the region.

Consequently, J.P. Morgan lowered its year-end price target for SolarEdge from $73 to $59, reflecting the steep challenges the company faces.

Leadership changes: A new CFO on the horizon

Amid these financial strains, SolarEdge is also undergoing significant leadership changes.

The company has announced a transition plan for the CFO role. Ronen Faier, the current CFO, will step down, and Ariel Porat, currently the Senior VP of Finance, is expected to take over.

Industry-wide headwinds: Tariffs and trade issues

On a broader scale, the U.S. International Trade Commission’s recent vote to investigate anti-dumping and countervailing duty petitions on solar imports from several Asian countries could further complicate matters.

New tariffs could increase costs for SolarEdge, which relies on a global supply chain. This potential rise in expenses comes at a time when the company is already dealing with significant financial outflows and market pressures.

Cash Flow concerns

SolarEdge’s financial health has been under scrutiny. Despite reaffirming its Q2 guidance, the company anticipates a negative free cash flow of approximately $150 million for the quarter.

Factors contributing to this include discretionary investments, extended customer credits, higher working capital needs, and slow receivables collection.

Over the past 18 months, the company has seen nearly $750 million in cash outflows. With a net cash position expected to dwindle to around $165 million, the recent convertible notes offering appears as a necessary step to bolster its liquidity.

SolarEdge’s stock has plummeted significantly from its peak, losing more than 90% of its value. Analysts and investors are now questioning whether the stock represents a deep value opportunity or if further declines are imminent.

With the stock trading at multi-year lows and investor sentiment wavering, it becomes crucial to delve deeper into the technical aspects of SolarEdge’s stock performance.

By examining the price patterns, trading volumes, and key support and resistance levels, we can gain further insights into the potential trajectory of SEDG in the coming months.

Playing the waiting game: High-risk environment

After a quick rebound following the market crash in early 2020, SolarEdge’s stock remained rangebound between 2021 and 2022. It thrice tried to break above $360, but retraced from there, which was the first early signs for bulls to get out of the stock.

SEDG chart by TradingView

In 2023, amidst carnage in solar stocks, SolarEdge fell from highs above $320 to below $80. It experienced a brief bounce back in late 2023, but quickly changed its course and has lost a further 70% of its value this year.

Considering the stock is expected to open weak today, we cannot recommend investors to initiate fresh long positions unless the stock first finds some kind of support. Even if support is found, one should ideally initiate only a small long position.

Traders who are bearish on the stock and have not initiated a short position yet, should also not try to short the stock after today’s decline as SolarEdge is one of the most shorted stocks currently with a short interest of close to 20%.

In the past few weeks, we have seen these most shorted stocks experiencing violent short-covering rallies and there is a high chance SolarEdge’s stock can experience something similar.

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