Enphase: A Run For The Sun
Summary
- Enphase's fall into Covid-19 induced bear territory provides a stellar opportunity to buy into a premier player in the renewable energy space.
- Enphase put up extraordinary YOY 1st quarter numbers often dreamed about by investors but rarely achieved in real time.
- Beyond Covid-19 remains the proving ground for the company and the planets of growth appear well-aligned.
Renewable electricity costs have fallen dramatically over the past decade as technology, economies of scale and competition have all contributed handsomely in driving the cost of utility-grade photovoltaics (PV) prices down by 82% over the past decade. The per kilowatt hour costs have fallen over the period to a global average of $0.068 through the end of 2019. Utility-grade solar prices are expected to reach $0.039/kWh by 2021, falling well below the costs of comparable coal-fired plants. Falling renewable energy prices allowed the breach of an important threshold through the end of 2019: Renewable energy consumption in the US surpassed that of coal for the first time in over 130 years. Replacing a 500 GW coal-fired utility with a solar and wind equivalency would produce cost savings in the neighborhood of $23 billion annually while reducing emissions by about 1.8 gigatons of CO2, or about 5% of global CO2 emissions for 2019. The multiplier impact of the investment would come in at about $940 billion, or about 1% of global GDP.
Last month, the California Energy Commission began requiring most new residential and commercial buildings be outfitted with solar panels for structures built after January 1, 2020. California’s new law is the first of its kind in the nation and a clear boon for the solar industry. Critics cite the outsized mean price of California homes with a nation-leading range from $1.2 million in San Francisco, $630K in Los Angeles and $572K in San Diego, the state’s three top markets. The new regulation is expected to add about $10K to the cost of new construction, offset by an estimated $19,000 in projected energy and maintenance savings over a 30-year period.
Clearly hanging ten on this wave of growth, California-based Enphase Energy (NASDAQ:ENPH) (green-red line) is trading at a significant price performance premium for the year over rivals Israel-based SolarEdge Technologies (SEDG) (orange line) and Wisconsin-based Generac Holdings (GNRC) (purple line) through Friday’s market close (May 29). Enphase’s price performance premium over the S&P 500 benchmark (black dotted line) is even more pronounced (see Figure 1, below).
Figure 1: Enphase Energy, SolarEdge Technologies and Generac Holdings against the S&P 500
Much of Enphase’s stock performance centers on its microinverter business, which converts DC power at the solar panel to AC current used in the home, and its software-defined, cloud-based platform that monitors the generation, distribution, efficiency and storage of the energy produced. The company’s purchase of SunPower’s (SPWR) inverter business in August of 2018 saw Enphase’s microinverter sales soar through the end of the 1st quarter 2020 to 2.01 million sold with a total DC capacity of around 643 MW. The gross shipment is up 106% YOY. Much of FY2019 was spent ramping up microinverter production capacity to meet the increased demand. Enphase gained exclusive rights to supply SunPower clients with microinverters as part of the sale package for a period of five years, with options of renewal. Interestingly, Enphase does not actively use the microinverter technology acquired by SunPower, using its proprietary IQ family of microinverters combined with its software diagnostics on a cloud-based platform. Revenues jumped from $100.2 million to $205.54 million through the end of 1st quarter, a 105% jump YOY. Gross margins beat an equally stellar path, up 142% over the same period. Earnings per share went from $0.02 to $0.50. That’s EPS growth of 2,400% in a year’s time - a pretty rare accomplishment as markets go. Doesn’t leave much to the imagination as to why the stock currently trades at about 33 times earnings.
Competition abounds and the threshold to entry into the space is not outwardly steep. SolarEdge employs a central single-phase inverter to its solar array installations in distinction with Enphase’s microinverters that attach to each panel of the array. Optimizers maximize energy generation throughout the system while control, monitoring and diagnostics are also cloud-based. SolarEdge has upped the ante in the storage space through the purchase of the South Korean company Kokam in October 2018. The company provides lithium-iron phosphate cells and storage solutions. In April of this year, SolarEdge took out a contract to purchase over 56,000 meters of land to build a factory to produce lithium-ion battery packs. SolarEdge’s revenues are up 52% with profit margins following suit at 50% gains over the period. Earnings per share rose just short of 8%. The stock trades at about 17 times earnings.
Generac Holdings is better known for commercial, residential, and industrial generators. Further, the company’s foray into solar applications is too recent to register balance sheet impact as yet. In March of 2019, the company purchased British Columbia-based Neurio Technology, which specializes in energy metering and analytics, to optimize energy use in both commercial and residential applications. A second purchase during the month brought Maine-based Pika Energy into the equation. Pika Energy, which designs and manufactures battery storage technologies to capture and store, manage and monitor solar-generated electricity for home and commercial use, completed the circle. Overall revenues since these two key purchases were up almost 9% with gross margins up just over 10% for the period. Earnings per share are up just under 14%. The stock trades at about 15 times earnings.
Enphase’s 8th generation IQ microinverter and the company’s Encharge battery storage system will have a Chinese-manufactured lithium-iron phosphate battery with a storage capacity of 1.7 kWh capacity. Both are slated for release later in the year.
Figure 2: Enphase against the S&P 500
Covid-19 is the standout headwind to the growth plans certainly through the end of the 2nd quarter and hopefully not beyond. Unsurprisingly, the demand for solar installations in late March/early April dropped off a cliff. A momentum pullback on the company’s share price was a foregone conclusion. Taking the bull by its horns, Enphase offered up 2nd quarter guidance in its May earnings call. The midpoint of the guidance came to $122.5 million - well under the consensus estimate of $143 million. The guidance implies a 30%+ drop in microinverter shipments QOQ, with improvement being staged in the 3rd quarter (barring a second Covid-19 wave) when revenue is expected to recover to some semblance of pre-pandemic levels. The latter part of the year will also see the delayed launch of its IQ8 generation of microinverters and the Encharge storage system. There were no announced supply chain disruptions. Enphase’s Mexican manufacturing facility continues to be considered an essential business by national and regional authorities and experienced no curtailment in work. Manufacturing capacity in China was ramped up after the Chinese New Year.
Of course, the guidance drew a rather swift market reaction as investors whacked about 17% from the stock price in three consecutive trading sessions through the 22nd of May (yellow ellipse Figure 1, above). Another 7% drop through the market close on the 4th of June places Enphase in bear territory (see yellow box in Figure 2, above). Enphase was riding high in the first two weeks in May with the stock squeaking into overbought territory on two separate occasions during the period (see bottom frame of Figure 2, above). By the latter stages of the month and into the early days of June, the impact of Covid-19 had taken its toll on new orders. Enphase’s 50-day moving average is now at 46.34 while its 200-day average is at 33.67. The stock closed at $51.50 through Thursday’s (June 4) market close, down 24% from its May 19 high of $67.04.
For its part, SolarEdge was more circumspect in its 2nd quarter projections. The company settled with projecting lower revenues, gross margins, research/development costs, sales/marketing and administrative expenses for the 2nd quarter. The cost of revenues is expected to rise for the 2nd quarter, statements tucked deep in the weeds of the company’s 10Q SEC filing for the 1st quarter. Generac Holdings (as did most companies) simply refrained from providing 2nd quarter guidance.
Beyond Covid-19, Enphase envisions growth not only from its exclusive SunPower service contract and the 80,000 new homes scheduled for construction in California under the new California Energy Commission guidelines for the coming year. The company announced several new alliances in March and April that should add greater national and international revenue reach to the company’s bottom line. A full 131% of 1st quarter revenue gain came from domestic sources while international revenue came to just under 16% for the period. International revenue made up about 13% of total revenue in the 1st quarter, with plenty of room for further growth. On the national front, in mid-March the company announced an alliance with Amicus Solar Cooperative. Amicus Solar is a Certified B Corporation and public benefit corporation. Its members install solar arrays in all 50-states, the District of Columbia, Puerto Rico, and Canada. Internationally, Enphase announced a new alliance structure announced with Rexel Australia, a multichannel solar distributor with reach throughout the vast Asian market. Across the Pond, an alliance was announced with Courant Naturel, a residential solar installer based in Soual, France. The company already has single-digit market penetration in the Netherlands and currently is expanding its marketing distributor partnership agreements in Germany and Spain.
Wary and mindful of the Covid-19 hit on its stock price, Enphase announced a stock repurchase program worth $200 million. While a questionable use of resources in the eyes of most economists, with $593.8 million in cash and equivalents on the balance sheet through the end of the 1st quarter, the buyback will likely increase shareholder value over the short term, which will provide time for more organic revenue streams to revitalize the balance sheet over second half of the year and beyond. A 24% decline in the company’s share price since the 19th of May comes as a convenient plus for the program.
For decades, the emphasis on power generation for commercial, residential, and industrial use has been on making sure there always was enough power to meet peak demand levels at any moment of the day or night throughout the year. With the growing importance of renewable energy to the grid and the oversupply of the grid under peak sun and wind conditions, the storage of excess supply has become the new and highly competitive frontier for grid management. From an investment standpoint, scale matters. While the cost of battery storage capacity continues to fall, the necessary revenue streams from future battery storage capacity continue to be difficult for most investors to commercially interpret. Investment in the technology to make storage capacity a viable long-term investment program with quantifiable income streams attached is being pulled forward with the greater reliance of the grid on renewable energy sourcing. All three companies are clearly gearing up to compete in the storage space. Enphase and SolarEdge will continue in the role of the duopoly in the space for the intermediate term with Generac and certainly others continuing to nip at the heels of these leaders in the years to come. The path to growth in the space, Covid-19 withstanding, remains bright.
This article was written by
Analyst’s Disclosure: I am/we are long ENPH, SEDG. 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.
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Comments (63)
That being said my question is were these shares listed in the public float thus should increase earnings per share even in these troubled times?
Need some help from you financial guys to figure this out.
Yes the one large selling insider did give Enphase several million dollars years ago for some of his shares.
I suspect his tax bill will be more money than most of us dream about.
Aren't there other companies it could 'scoop up'?
This is a question as I'm not familiar with the industry.😯
The differential will separate the promote from the value.
Essential you get up to speed.
The differential delivers windfall profits.
No need to involve huge capital outlays.
Ignore the SPWR module experience.
You give credit to SEDG with out a single quarter of storage profits to date.
Opinions are empty with out examining the data.
Big gaps in your knowledge.
