The Market Lifts SolarEdge Technologies, Inc. (NASDAQ:SEDG) Shares 58% But It Can Do More

SolarEdge Technologies, Inc. (NASDAQ:SEDG) shares have continued their recent momentum with a 58% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.6% in the last twelve months.

Although its price has surged higher, SolarEdge Technologies may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.6x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios greater than 4.4x and even P/S higher than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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See 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. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think SolarEdge Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as SolarEdge Technologies' is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 59%. As a result, revenue from three years ago have also fallen 59% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 22% per year as estimated by the analysts watching the company. That's shaping up to be similar to the 22% per annum growth forecast for the broader industry.

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?

SolarEdge Technologies' recent share price jump still sees fails to bring its P/S alongside the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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.

Before you take the next step, you should know about the 2 warning signs for SolarEdge Technologies (1 makes us a bit uncomfortable!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.