2023-03-13 15:13:11 ET
Summary
- Enphase specializes in rooftop microinverters market, offering increased solar system efficiency, lower maintenance costs, and longer warranties.
- ENPH's gross margin is the highest in the industry, but it faces the risk of growing commoditization of its primary product, microinverters, as new competitors enter the market.
- ENPH aims to expand its total addressable market by transitioning to offer complete home energy solutions and targeting new markets.
- I recommend closely monitoring the company's progress in expanding into home energy solutions and target markets but suggest staying on the sidelines for now due to a fair share price estimate of $156, representing a 26% decline from current levels.
In this article, I'll discuss Enphase Energy Inc.(ENPH)'s current position in the industry, including its high gross margin and expansion plans, the potential risks it faces from policy changes, and the growing commoditization of its primary product, microinverters. As new competitors enter the market, I believe ENPH's returns will likely decline from the current +20% to a more sustainable 11%. Based on this analysis, I estimate a fair share price of $156, representing a 26% decline from current levels. As such, I recommend staying on the sidelines and closely monitoring ENPH's expansion and new product initiatives.
The company
ENPH is a global energy technology company that provides intelligent and easy-to-use solutions for managing solar generation, storage, and communication on a single platform. Their microinverter technology is specifically designed for the rooftop solar market, offering a complete solar-plus-storage solution. While ENPH operates globally, it generates 76% of its revenue from the United States.
ENPH is a leader in the solar system microinverter technology industry, an essential component that converts direct current from solar panels into usable alternating current while optimizing energy production. The solar market typically has three types of inverters: string inverters, central inverters with power optimizers, and microinverters. ENPH has primarily focused on microinverters for the rooftop market, which is rapidly growing in popularity.
Highest gross margin in the industry
ENPH stands out among the top solar companies with the highest gross margin. Microinverters sell for +50% more than conventional inverters. A conventional inverter costs about $0.75 per watt, while a microinverter costs about $1.15 per watt ( source ). The higher price is due to the microinverter's complexity and the additional components it requires compared to conventional inverters. Microinverters offer several benefits, such as increased solar system efficiency, lower maintenance costs, and longer warranties. Furthermore, ENPH's microinverters enable ENPH to offer a complete home energy management system, potentially increasing customer loyalty and retention.
Moving Beyond Microinverters to Offer Complete Home Energy Solutions and Target New Markets
ENPH is transitioning from solely a microinverter provider to a company offering complete home energy solutions. This strategy allows ENPH to expand its total addressable market while continuing to serve the core end market of distributed generation. It also aligns with the trend towards increasing distributed generation and electrification of demand.
Moreover, ENPH aims to diversify its end markets by expanding geographically and targeting different market segments. ENPH has successfully grown its international business in recent years, with international revenue accounting for 24% of total revenue in 2022, up from 20% in 2021. ENPH seeks to build on this success by expanding further into Europe, Australia, and Latin America.
ENPH has been providing commercial solutions since 2014 through its M215 and M250 microinverters with varying degrees of success. However, in the second half of 2023, the company is set to launch the commercial versions of IQ8, namely IQ8H-3P and IQ8P-3P , microinverters suitable for small commercial segments and compatible with larger solar panels (440W compared to 215-340W for the older models). Also, this new model can form microgrids and operate independently of the grid.
Rooftop Solar PV Market Growth and Policy Landscape
The global rooftop solar PV market is expected to grow at a CAGR of around 6% from 2020 to 2030. This is due to the rising deployment of renewable energy, the cost-effectiveness and space-saving benefits of rooftop PV, and the increasing private sector investment in distributed solar PV. However, some uncertainties and challenges may affect the rooftop solar outlook, such as the variability of solar output, grid integration issues, and regulatory and policy barriers.
At the federal level, the Solar Investment Tax Credit (ITC) is one of the most important policies that provides a 30% tax credit for residential and commercial solar systems installed before 2023.
Different states have different policies that either support or hinder rooftop solar development. Some of the key policies are net energy metering (NEM), renewable portfolio standards (RPS), and interconnection standards. NEM allows rooftop solar owners to sell their excess electricity to the grid and receive credits on their utility bills. RPS requires utilities to source a certain percentage of their electricity from renewable sources. This policy creates a market demand for rooftop solar and other clean energy technologies. Interconnection standards regulate how rooftop solar systems can connect to the grid and what fees and requirements they have to meet. This policy affects the ease and cost of installing and operating rooftop solar systems.
Some states have more favourable policies than others for rooftop solar, with California, Hawaii, New Jersey, Massachusetts, and New York being among the top states for rooftop solar deployment.
However, some utilities and regulators argue that rooftop solar owners are not paying their fair share of grid costs and are shifting the burden to non-solar customers. This has led to some states proposing or enacting changes to their metering policies that make rooftop solar less attractive or accessible. California, for example, is considering a proposal to reduce the compensation for NEM and impose new fees on rooftop solar owners, which many solar advocates and customers have opposed.
On the other hand, some states, including New York, Massachusetts, Hawaii, and Nevada, support rooftop solar by adopting or considering more favourable policies that recognize its benefits. For instance, in New York, City Council members introduced a bill to boost the city's solar capacity and help it meet its climate goals by easing regulations for the installation of solar panels. The bill proposes a change to the fire department code that would decrease spacing requirements hindering the use of solar panels on city rooftops.
In Massachusetts, the state provides a range of incentives and programs for rooftop solar, including the SMART program, which offers fixed compensation rates based on the location, size, and type of system. Additionally, the state has a net metering policy that enables customers to receive credits for excess solar generation, which can be applied to future bills.
In Hawaii, regulators have implemented a performance-based system that incentivizes utility companies to quickly connect rooftop solar systems to the grid and reduce their reliance on fossil fuels. The state also has a tariff program that pays customers for exporting solar energy to the grid at a fixed rate.
Similarly, in Nevada, a bill was passed in 2021 that reinstates net metering for rooftop solar customers at 95% of the retail rate, reversing a previous decision that reduced compensation and caused a backlash from the solar industry and consumers.
The commoditization of the solar industry supply chain
In the PV solar industry, many components in the supply chain have become commoditized, including solar modules and inverters. Solar modules are essentially panels that contain solar cells. At the same time, inverters convert DC electricity from the modules into AC electricity that can be used by appliances or fed into the grid.
The market for utility-scale inverters has been commoditized as project developers prioritize finding the cheapest and most readily available inverters rather than the ones with the best features or performance. This pressures inverter manufacturers to lower their costs and ramp up their production capacity. Inverters have also become standardized and mass-produced , using similar technologies and components such as power optimizers or microinverters.
Similarly, solar modules have been commoditized as they have become mass-produced and standardized, with little variation among brands and types. Most solar modules utilize crystalline silicon solar cells with similar performance and efficiency characteristics. Solar module prices have also significantly decreased over the years due to technological advancements, economies of scale , and competition from low-cost producers, particularly in China. As a result, solar modules are now considered interchangeable products that primarily compete on price and availability.
Competition to intensify
Several companies compete with ENPH in the microinverter market, including ABB Asea Brown Boveri, SolarEdge Technologies ( SEDG ), SunPower Corporation ( SPWR ), and Darfon Electronics Corporation. As microinverters become more widely used, new players will likely enter the market. Here are a few examples of such companies:
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Sparq (SPRQ:CA), a Canadian company that has developed a three-phase microinverter for solar water pump applications.
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Chilicon Power, a US-based company that designs and manufactures grid-interactive inverter systems and monitoring solutions, was recently acquired by Generac Power Systems ( GNRC ) and is now branded as Generac PWRmicros.
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Northern Electric Power, a Chinese company that boasts high efficiency and performance metrics, offers a range of microinverters, power optimizers, and hybrid inverters for residential and commercial solar applications.
Valuation
I value ENPH shares at $156 per share based on a DCF model. The cost of capital used in the model is 7.1%, derived from an unlevered beta of 0.88 for the industry. While I expect volumes to increase in the medium term, I anticipate a deceleration in growth as state policies change, reducing the economic appeal of solar for customers. I expect ENPH to continue gaining market share driven by the popularity of microinverters. I included partial growth from the entrance into new markets. Furthermore, with the commoditization of microinverters and new players entering the market, I see prices dropping. This will make it challenging for ENPH to maintain a high ROIC, which I project to decline to 11% over time.
Here are the primary assumptions used in the DCF model:
Risk
ENPH relies heavily on the US residential market, which accounts for 76% of its revenue. However, this market operates in a cyclical industry, so federal and state policies can significantly affect its growth trajectory.
Although state policies have been supportive of residential solar, this could change as more people adopt this technology. For example, net metering, which allows homeowners to sell their excess solar production, is under review in several states. If compensation decreases, it could negatively impact the economics of solar.
Additionally, utilities are shifting towards more fixed customer bills. This could discourage homeowners from adopting solar as it could reduce savings on energy bills. Therefore, investors should closely monitor policy changes and their impact on ENPH's revenue and growth potential.
Conclusion
ENPH faces risks from policy changes and increased competition in the commoditized microinverter market. While the company's expansion into complete home energy solutions and target markets is promising, I recommend closely monitoring its progress. With a fair share price estimate of $156, representing a 26% decline from current levels, I suggest staying on the sidelines for now.
For further details see:
Enphase Is Overpriced Due To The Commoditization Of Its Main Product