Enphase Energy's (NASDAQ:ENPH) share price has been decimated. Since last year, the share price has eroded from $15 to about $2. Reasoning behind this poor performance can be attributed to the fact that 1) Wall Street does not believe Enphase can compete with its main competitor SolarEdge (NASDAQ:SEDG) on price along with other power optimizer-central inverter solar system vendors, and 2) the $100 million dollar R&D investment Enphase has made in the storage arena has not yet materialized into serious revenue. Companies like SolarEdge in the past 2 years, have undercut Enphase on price, and have been able to gain marketshare from Enphase as a result. Furthermore, the doom and gloom which had been affecting the entire solar industry with the expiration of the Federal Investment Tax Credit "ITC" at the end of 2016 has no blown over, and the ITC has been extended to 2021 - 30% Federal tax credit through 2019, after which it will fall to 26% in 2020, 22% in 2021 and 10% in 2022.
According to Erez Dolev, CEO of Renvu.com, a major distributor of solar equipment, based out of Mountainview, California, the microinverter marketshare is owned by Enphase - there is no comparison between Enphase and the other microinverter vendors in terms of number of microinverters sold. Of the 6 microinverter brands sold by Renvu including SMA, ABB, NEP, Darfon, and Renesola, Enphase rules the roost. However, between the microinverter and power optimizer markets, cheaper is still the deal breaker, and that gives power optimizer vendors like SolarEdge the "edge" over Enphase. But still, when there is a special on Enphase - free trunk cable, free microinverter with purchase, or some other type of freebie, Enphase regains the "edge" over SolarEdge and vice versa.
So, Enphase is the king of the microinverter market, for no other microinverter maker is in its 5th major generation of product, nor has any vendor sold more than 10-million microinverters. Most of the microinverter makers out there, still do not have "integrated ground" with their product which adds both a hidden cost and additional installation time to their product. Many of the microinverter vendors warranty their product for 10 years like SMA(OTCPK:SMTGF) and ABB(NYSE:ABB), but Enphase warranties their microinverter in the USA for a full 25 years. Microinverter companies like SMA, ABB (Power-One), Northern Electric Power, Darfon, and Renesola(NYSE:SOL) have nowhere near the market share Enphase has, nor do they have the reputation and awareness among installers which Enphase possesses. CEO Paul Nahi said, "There are no reports that show microinverter market share because they would look stupid. You'd see Enphase at 97, 98 percent and you'd see 50 other companies at a fraction of 1 percent".
A major issue for customers buying into solar PV is understanding - understanding the difference between a system of quality and value, and a system of lesser quality and value. Because your SolarCity's (NASDAQ:SCTY), Vivint's (NYSE:VSLR), Sungevity's, SunRun's (NASDAQ:RUN) etc, are pushing the cheapest, lowest-possible-cost systems out there to get the sales, the lowest price wins - but not necessarily the best system for the customer. There are 2 predominant residential solar systems available - 1) system of solar panels with accompanying microinverter devices, and 2) a system of solar panels with accompanying power optimizers, with a central string inverter attached which all of the power optimizers feed their electricity through. System #1 offers a decentralized architecture which is superior in that it is fault-tolerant with no single point-of-failure. System #2 offers a centralized architecture which is not fault-tolerant in that there exists points-of-failure throughout the system, allowing the potential for the entire system to be compromised. Cheaper is not always better, but many installers are selling the cheaper system because price does matter - so, the solar solution which has gained traction in the last couple years is the power optimizer-central inverter system, and SolarEdge and others, have been able to gain marketshare from Enphase - primarily on a cost-basis only. This proves that customers will sacrifice the superiority of the system for having a lower price-tag.
As a result of this marketshare loss, within the past year, Enphase has made cost reductions, and now its low-end product has been able to achieve price parity with the power optimizer competition, SolarEdge. Enphase's M-215 microinverter, with integrated ground, is now selling for about $0.45/Watt; a SolarEdge solution with power optimizer and central inverter is also selling at about $0.45/Watt.
Still, the devil is in the details - if you look further, you can see that SolarEdge only offers a 12-year warranty on its central inverter product - they offer extended warranties to match Enphase's 25-year warranty for about $500. Also, if you look at the warranty trends between the 2 companies, you will find that SolarEdge's warranty costs have increased, whereas Enphase's warranty costs have decreased - a positive sign for Enphase.
Also, like many of Enphase's microinverter competitors, SolarEdge power optimizers do not have integrated grounding. All of Enphase's products have integrated grounding built-in. This is not a major issue, but it is a hidden issue, a hidden cost, and an installation issue. If installers are to be fair in pricing out a SolarEdge and an Enphase system, then this consideration also needs to be made.
Then, there is the subject of cabling. With Enphase, you get a quality, robust cable to connect the microinverters to, called a "trunk cable", and the cable is sold on a per-port (per panel) basis averaging about $17 per port, so for a 28 solar panel system, that's another $475. Now, let's consider some common sense here - when it comes to electricity coming off your roof on a hot summer day, aren't you willing to pay extra to have quality electrical cabling connecting your solar panels together; you don't want to cheap out and sacrifice safety for savings. Many of the microinverter companies sell their cabling at about the same price as Enphase, and some even give it away for free. As an installer with knowledge of using Enphase's trunk cable, the cable is high-quality - kind of like what you get when you buy a MacBook Pro verses buying a cheap, throw-away Acer notebook. Where safety is an issue, most will spend the extra money, and if you're going to be making a huge purchase on a solar system, $475 is not going to break you.
Furthermore, most people do not understand the difference between AC and DC electricity, but the potential solar customer should know; getting zapped by a 120-volt electrical plug in your home hurts, but it will not kill you - this is AC. Getting zapped by 600-Volts on your roof running DC will hurt you, maybe even kill you; but, with safety precautions followed, the electrician do not get zapped, for they know what they are doing, and you, the customer, will probably not go up on your roof and start sticking a screw driver into electrical junctures knowing that you would be electrocuted. With this type of awareness between AC and DC, you need to know that at 600-Volts, that is a lot of electrical force, and it is a lot of heat, and that means that the wiring used to carry that voltage, must be of high quality. Why go cheap? Enphase is synonymous with quality. Ask your installer about high-quality cabling and the options available. The nice thing about using Enphase's trunk cable is that it is a standard, and standards leave less room for error.
Finally, Enphase's decentralized, modular, scalable, simple and safe approach to solar conjures up ideas like "power to the people", "self-reliance", and "energy independence". When you have these qualities built into products from the design stage on up, what price can you put on these products? Are people on average willing to pay more for products with these qualities? As Paul Nahi, CEO of Enphase, recently stated at the company's conference call on February 23rd - "What we have seen repeatedly is that, if Enphase is at or even slightly above competitive offerings, the customer still chooses Enphase, and they'll choose Enphase because we are easier to design, easier to install, more reliable, far easier back-end logistics" - meaning their software web portal solution is better, more evolved, and easier to use.
SolarEdge offers free monitoring for its customers for their solar systems. Unlike microinverter vendors, SolarEdge's central inverter has monitoring capabilities built-in and also acts as a communications gateway. With Enphase, as with other microinverter vendors, if the customer wants monitoring capabilities, then they have to buy a communications gateway called an "Envoy" and pay a one-time software fee which is about $387 for the package - this allows the customer to login to Enphase's web portal called Enlighten to monitor their solar system. Again, simplicity, is a major issue - take the response from an installer called AustinSolarGuy on a Yahoo blog recently - "I install a lot of Enphase and a lot of SolarEdge. I really like Enphase Enlighten over the Solaredge monitoring portal and so do the customers when I show them both. Enlighten is easier to set up. I can set up an Enphase system in Enlighten in less than 5 min start to finish. With SolarEdge it takes a bit longer but not much, But the installer set up with SolarEdge is not as intuitive. I can show somebody that has never set up a system in Enlighten how to do it once and they can do the next one solo, not so much with SolarEdge, there is a steeper learning curve there". And then a final comment - "Lots of installers sell on price, I'm not one of them. I'm not the cheapest in my market and I have no desire to be that guy. I do quality work and I install quality hardware. The guy selling Mercedes knows that the guy down the street selling Kia rolls more steel off his lot, but somehow the Mercedes guy isn't concerned because he understands that while they both sell automobiles, they cater to a different clientele. I will always offer a premium system, I deal with a customer base that wants to have the best". So, if Enphase and SolarEdge reach price parity, what logically will happen to Enphase? To SolarEdge?
At Enphase's Analyst Day presentations on November 15, 2015, Enphase laid out a road-map for its price reductions and how it would accomplish them. Unlike the older, mature central inverter and power optimizer technology, the newer microinverter technology is still maturing, and there is plenty of room for consolidation and improvement. In Enphase's presentations, key senior officers from various areas of the company operations explained how within a couple years, they would optimize the microinverter technology and its production; their goal is to bring the cost of the microinverter down to $0.10/Watt. Well, it is March, 2016, and already Enphase, with its low-end M-215 microinverter product, is reaching price parity with SolarEdge, so visible progress is being made.
Currently, Enphase has more than 335,000 Enlightened-registered customers monitoring their own systems, and like the old Apple saying - "once you go Mac, you never go back!", Enphase customer loyalty is strong, and many are awaiting the company's storage offering, so in effect, Enphase's storage solution already has pseudo-reservations awaiting. Its storage solution will be released in the 2nd quarter of 2016 and is in beta test at sites right now in Australia. The AC Battery storage solution will create a whole new market for Enphase, and will insure that Enphase remains a serious home energy solution for the future. Who in the future is going to want to buy their microinverters from company A, their solar panels from company B, their battery inverter from company C and their battery from company D, or some variation of that? The home storage market is in its infancy, and Enphase is selling a modular, scalable, lightweight, safe, plug-n-play storage device with a built-in inverter - with SolarEdge, you will have to buy 1) an inverter or up-size your existing central inverter, 2) a big-box, heavy battery, and 3) an AC transformer device - if it sounds complex, it probably is. With Enphase, you buy simplicity, and buy what you think you'll need with the option to buy more at a later date, and then, there is a good chance that the technology will have improved, so you can get even more bang for your buck. With the competition, they want you to buy the whole big box solution up-front, and the idea of a modular, scalable solution is not the key selling point; instead, words like "locked in" and "caveat emptor" come to mind. Customers will need to consider whether it is more logical to buy a 200-pound Tesla(NASDAQ:TSLA) Powerwall to take up space in their garage, or buy a few 40-pound, plug-n-play batteries which can be mounted on their wall out of the way and connected to their home's electric panel quite easily. Furthermore, what happens when the 200-pound Powerwall needs to be moved or replaced? Is shipping covered both ways? These are potential hidden costs.
To evaluate Enphase's huge investment, you must consider the various battery uses - uses which should not be mixed - 1) emergency backup and 2) load balancing. Emergency backup is for when your power goes out, and you need an emergency power source which is fully charged. You will need a lot of emergency backup power to match the $995 10,000-Watt home gas generator, so is it worth it? Load balancing is a not so well-known battery technique that allows you to use your batteries constantly lessening the reliance on grid power, especially during high-rate times, and saving the customer even more on their electricity bill. By not having to rely on the battery for emergency backup, you do not need as big a battery, hence a lower cost-of-entry for customers into the storage arena, and as discussed earlier, price matters. Understand that buying a huge battery to use for both load-balancing and emergency backup does not make sense since you don't know when the power will go out, and who is to say that your big battery will only be at 2% charge when the power goes out - kind of makes emergency backup useless. Enphase's vision is for a load-balancing battery which is why its storage solution is capable of 2 charges daily, something other batteries might not be able to do. Modularity is key - with multiple Enphase AC batteries in use, no single battery affects the other should a failure occur; with the competition, if a failure occurs, the entire storage system is compromised, and for how long? With Enphase, just order a warranty replacement, unplug the defective one, and plug in the new one - it will be that simple. Simple sells, not complexity, and Enphase sells "simple".
The other strategic move Enphase has made by investing into the storage arena, is that it has bolstered its relationship with the utility companies. With Net Metering ended in Hawaii this past year, utility companies like Hawaiian Electric Company "HECO", have mandated that new solar PV installations include some form of storage with it. This has been done so that HECO can double or triple its current load of solar PV customers. With 17% of Hawaiian rooftops containing solar already (approximately 53,000 households) - in Hawaii alone, that number could increase to almost 160,000 customers - that's potentially a lot of solar business and batteries. In Australia, where Enphase's AC Battery storage solution is first being debuted, the feed-in tariffs (FiTs) have ended, so new customers must purchase storage for their solar PV systems so that excess electricity is not given away for free. Enphase's movement into storage has been a serious investment by the company; it will seriously complement Enphase's microinverter product line and allow them to offer a sexy, home energy solution to customers. From both customer loyalty numbers, strong interest and demand, along with changing utility bureaucracies which favor storage, Enphase's investment should give them a whole new market for revenue.
In summary, Enphase has addressed its competitor's pricing undercuts, yet SolarEdge is still touting itself as the most cost-effective solution for residential, commercial and large field installations. Ask any installer out there who knows Enphase and SolarEdge and which product they prefer, and you will usually get Enphase as the response. Ask any installer out there which is the cheapest product, and you will usually get SolarEdge as the response. That type of thinking is starting to get old. Wall Street, the solar industry, and more than 335,000 customers are awaiting the AC Battery product, and if it is anything like the microinverters, Enphase may not be able to keep up with demand - as CEO Paul Nahi stated in the company's last conference call - "demand for storage is coming from pretty much every geography we are in, whether it is Latin America, obviously America, Europe, as well as the Asia-Pacific region". Now, for a company which is really the King of Microinverters, and clearly holding the lion's share of market for that technology, and is also entering a whole new market with demand off the Richter scale, how can this stock continue to be valued at a mere $2 per share?
Disclosure: I am/we are long ENPH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.