Why Would Top-Rank Entrepreneur T. J. Rodgers Want To Join Enphase?

| About: Enphase Energy (ENPH)

Summary

Mr. Rodgers has a great reputation for creating shareholder value.

Enphase's high-volume manufacturing will surpass strings plus optimizers.

Enphase has the most reliable solar solution.

Enphase's marketshare is growing.

Enphase's successful miniaturization of inverter technology is revolutionary.

Visionaries see potential before anyone else does, and that is why they are so admired. Your Henry Ford, Thomas Edison and Steve Jobs with their entrepreneurial spirits have turned visions into reality. On January 10, 2017, a lesser-known visionary, T. J. Rodgers, founder of Cypress Semiconductor (NASDAQ:CY) and KPCB Chairman John Doerr, invested $10M in Enphase Energy (NASDAQ:ENPH), and Mr. Rodgers assumed an active seat on the Board with the title, "Director of Enphase Energy". The $10M investment was an unexpected windfall for Enphase, even though it still came with a future dilution. Still, having a seat on the Enphase board filled with a veteran CEO with a proven track record of success, Enphase could not have done any better in getting T. J. Rodgers to fill that seat. And for the shareholders of Enphase, the excerpt from EE Times on 4/28/2016 should give them some serious comfort:

"Rodgers has often described himself as a passionate defender of 'shareholder rights'; he has addressed the subject repeatedly in his speeches and writings".

Reviewing Mr. Rodger's Wikipedia list of accolades and accomplishments - Top 100 CEOs, CEO of the Year Award, et cetera, just beg the questions: Why Enphase Energy, and why involve McKinsey? Maybe it is due to the inception of Enphase's Home Energy Solution in an IoT-based world, and even more so to the successful miniaturization of power conversion by Enphase with its microinverter designs, that a semiconductor industry veteran like Mr. Rodgers has taken a serious interest; for with new growth opportunities being created by Enphase globally, along with new revolutionary microinverters using cutting-edge wide-bandgap (WBG) and ASIC solutions being released in high volume, surely this is not the sign of a company that has run out of gas! No, Enphase Energy is going to make a serious comeback, and the optimism and synergy surrounding the company are being reflected in its recent share price performance.

Without getting too technical, consider that the biggest hurdles with central string inverters dominating the entire residential and commercial solar MLPE market are that 1) its supply chain will never get to scale, and 2) it is very difficult to miniaturize the power conversion in the kilowatt range without significantly complicating the design due to the combination of high current and voltage handling, let alone having to add a rectifier function for interfacing with a DC battery or smart grid control circuitry. Enphase is the disruptor technology in this arena, and it is preparing the release of its killer microinverter technology. No inverter maker has attained Enphase's level of technological proficiency and sophistication.

One of the underlying stigmas of the residential solar industry has always been its reliability. A homeowner makes a huge investment on a solar PV system, but has to expect a complete failure at one time or another during the next five or so years, with the outage durations being unknown. But, technology already exists which provides complete reliability - Enphase microinverters!

Since the 1980s, when solar systems first started appearing on people's roofs, installers used a centralized design topology consisting of a central string inverter through which all the solar panels interfaced. They used this design topology because it was cheaper to do so, knowing fairly well that when the central device failed, the entire solar system would be disabled; and believe it or not, this is how many solar systems are STILL being designed and installed today! This centralized topology would have gone the way of the dinosaur had it not been for the release of a complementary technology in 2010 called the "power optimizer" - this device ensured that if the homeowner had a shading issue, defective solar panel et cetera, the solar system would continue to operate normally; this gave a sort of quasi-fault-tolerance or reliability to the system, but it was not true reliability, for if the central string inverter failed, the entire solar system would still be disabled; however, it did give a life extension to the strings plus optimizers, as they are called, with their centralized topology.

In 2006, Enphase Energy marketed the first decentralized topology for solar systems; its technology touted a first-ever "complete reliability" and "100% fault-tolerance" for the solar solution. Enphase's solution used a "micro" inverter for each solar panel, so that in the case of a failure of any of the "micro" inverters or solar panels, the failure would not cause the entire solar system to be disabled. In the early revisions of the microinverter, though, the technology was not without its reliability issues; still Enphase was persevering and quick to understand the issues, resolve them and continue to grow its business. Since 2010 time frame, with the release of Enphase's third-generation M215 microinverter going forward, Enphase's microinverters have been impeccable in both performance and reliability, and this is reflected in the balance sheets where long-term warranty reservations have been reduced drastically from 2014 to 2015. In fact, Enphase now claims a five-PPM true failure rate for its microinverter products - that's five failures out of 1 million units produced! So, if the microinverter is now a truly rock-solid product, which data suggests it certainly is, then microinverters are about to cause some serious disruption for the inverter heavyweights in the MLPE market.

Enphase released a solid plan on Analyst Day in November 2015 to show how it would compete with its rivals. Since that time, the company has continued to gain market share, and most recently showed an increase to 30% market share in the State of California, as well as overall successive quarterly increases with "highest number of megawatts and units shipped in the history of the company"-type results. And with regards to pricing, let's look at SolarEdge (NASDAQ:SEDG) with its new StorEdge™ HD-wave central string inverter line - the same old centralized topology is warranted for 12 years; to extend the warranty to 25 years is almost an extra $1,500! Enphase's microinverters are warranted for 25 years! Price upfront is still the linchpin, but hidden costs are always lurking. Customers may pay less for a central string-plus-optimizer solution, but in the long run, they may actually pay more. What is the cost of a complete failure with unspecified amounts of downtime, especially if you have a Powerwall or EV that needs to charge from the grid during high TOU rates, instead of having your solar do it for free? What is the cost if you factor in the extended warranties, or you have to pay the full replacement cost for a new inverter? The old marketing hype stating Enphase costs much more than a string-plus-optimizer solution is basically fake news!

The sixth-generation IQ6 microinverter being released will reduce production costs by 30%, and will allow installers to halve their wiring costs with a two-wire configuration with true plug-n-play technology; this means much faster install times. As a result, Enphase's gross margins and price competitiveness will also increase. Think of Enphase's microinverter products in terms of Apple (NASDAQ:AAPL) marketing - M215 "Good", M250 "Better", and S280 "Best", and soon it will be the S280 "Good", the IQ6/6+ "Better" and the IQ7/7+ "Best" {see S300 p.23}. When I think of Enphase and its "microinverter", I think of Apple co-founder Steve Wozniak, another great visionary, who pitched the idea of a "mouse" on every desktop, and the HP (NYSE:HPQ) executives in New York City were repulsed, and well, you know the rest of the story; Enphase microinverters could be that "mouse-on-the-desktop" for the residential solar PV market with its legions of central string inverter mainframes trudging along to the Apple 1984 commercial! And when Enphase reaches the inverter price parity barrier with its IQ6 microinverter and then is able to breach it with its IQ7 iPhone-sized microinverter, then Enphase will regain dominance of the solar MLPE market. And in fact, there are those at Enphase who do not even recognize an MLPE market, but instead see their cell-phone-sized microinverters as part of the ACMs being released later this year by big panel makers such as JinkoSolar (NYSE:JKS), LG Solar, SolarWorld (OTCPK:SRWRF) and possibly others.

For simplicity's sake, consider the two predominant solar solutions algebraically - a string-plus-optimizer solution will always require X+1 devices; a decentralized microinverter solution will only require X devices. The projected production costs stated more than a year ago by Enphase on Analyst Day are about to be delivered, and the new line of microinverters being released means that the "X < X + 1" cost analogy is very close to fruition.

Also, in the latest round of good news for Enphase, disclosed in the 8-K, is the mentioning of McKinsey & Company global consulting services; this is noteworthy from a shareholder perspective because Enphase had already restructured itself via 7% and 11% headcount reductions and divestment of its O&M business to Maxgen (commercial) and Sunsystem (residential). McKinsey will likely further help with rationalizing and optimizing operational performance and balance sheets, and this helps 1) create a more viable company for shareholders and value down the road, and 2) short-circuit the bankruptcy thesis that many analysts had in mind.

The residential solar photovoltaic (PV) market is in its infancy where only 2% of households have it. Just drive around and look at all the roofing real estate that is unused that could be loaded with solar panels generating all that free energy from the sun. Thomas Edison, almost 100 years ago, was very keen on that concept. Solar energy does not have a shipping transportation cost, and that is not to be underestimated - the recent Ringling Bros. and Barnum & Bailey Circus sad news shows that transportation expenses played a major part in the company's failure, so how much different can it be for fossil fuels? And with solar being the biggest employment growth industry, bigger than all the fossil fuel industries combined, and with a newly-elected pro-laissez-faire administration entering office January 20th, residential solar should do quite well in the foreseeable future - and Enphase Energy IS residential solar!

Investors should be getting excited for the next conference call, especially in hearing the Q1-Q2 guidance. With Enphase truly being the Apple of the solar industry, it has decided to go where no inverter company has gone before - successful miniaturization of the inverter! Enphase has spent years and over $100M in R&D in developing a GaN-based, WBG technology allowing it to produce the world's most superior microinverter giving customers the most reliable solar systems on the planet. And you can surely bet that just like all the horse-n-buggy manufacturers a century ago who did not want to see Henry Ford succeed, so too, do the central string inverter heavyweights like ABB (NYSE:ABB), SMA (OTCPK:SMTGF) and Fronius, not want Enphase Energy to succeed, for if Enphase is successful in the roll-out of its new IQ6 microinverters with the IQ7s not far behind, then the old, venerable central string inverter will finally take a back seat to Enphase Energy's microinverters. From the recent $10M investment news, one thing for certain is that T. J. Rodgers and John Doerr believe that Enphase Energy has serious potential.

And just think what a perfect storm is brewing this year for Enphase Energy:

  1. cheap solar hardware
  2. the arrival of a newer, more powerful and better microinverter technology with lower production costs and faster installation times
  3. powerful alliances with major solar panel companies
  4. a pro-business administration entering the White House driven on job creation and trade
  5. the extension of the 30% Federal Investment Tax Credit giving residential solar PV an even bigger stimulus, and
  6. the arrival of T. J. Rodgers and John Doerr on Enphase's doorstep - talk about the cavalry arriving!

Enphase Energy is poised to make 2017 its comeback year. The Enphase Q4-2016 conference call is scheduled for February 21st. This will be the first conference call where the AC Battery storage technology, an entirely new revenue stream for Enphase, will be hitting the books; and considering that Enphase totally underestimated the demand for the AC Battery, there should be some real good news forthcoming, maybe even a surprise appearance!

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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