Even With A 30% Surge, Cautious Investors Are Not Rewarding SolarEdge Technologies, Inc.'s (NASDAQ:SEDG) Performance Completely

Despite an already strong run, SolarEdge Technologies, Inc. (NASDAQ:SEDG) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

Even after such a large jump in price, SolarEdge Technologies' price-to-sales (or "P/S") ratio of 2.1x might still make it look like a buy right now compared to the Semiconductor industry in the United States, where around half of the companies have P/S ratios above 3.9x and even P/S above 10x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for SolarEdge Technologies

What Does SolarEdge Technologies' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, SolarEdge Technologies' revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Revenue Growth Forecasted For SolarEdge Technologies?

There's an inherent assumption that a company should underperform the industry for P/S ratios like SolarEdge Technologies' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. As a result, revenue from three years ago have also fallen 62% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 21% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 22% per annum, which is not materially different.

With this information, we find it odd that SolarEdge Technologies is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What Does SolarEdge Technologies' P/S Mean For Investors?

The latest share price surge wasn't enough to lift SolarEdge Technologies' P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've seen that SolarEdge Technologies currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for SolarEdge Technologies that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.