First Look: Enphase Energy

First Look: Enphase Energy

You don’t have to be Warren Buffett to identify that solar energy is going to be important in the future. However, this past year — and what is likely going to be a tough winter ahead — may be the catalyst that elevates it to the top of customers’ minds. Our reliance on fossil fuels has truly been exposed and it will be in many people's best interests to rethink their energy needs. Once what is good for the environment coalesces with what is good for your wallet is when true progress can be made. With that in mind, I’ve decided to take a look at Enphase Energy today. 

Enphase Energy is the world's leading supplier of microinverter-based solar and battery systems for residential properties. A micro-inverter converts the direct current (DC) power collected from a home’s solar panels to alternating current (AC), the form of electricity your home can use. 

Micro-inverters, which Enphase pioneered back in 2008, greatly improve the efficiency of home solar panel systems. About the size of an internet modem, these gizmos sit underneath each individual solar panel, compared to a traditional string inverter, which uses one instrument to connect to multiple panels. This is important, as output from string inverter systems is dependent on the output of the worst performing panel, which could be affected by something like shade for example. This means that one panel can degrade the entire system, leading to wasted energy. On the other hand, micro-inverter systems are capable of extracting maximum output from each individual panel, even if one is compromised.

string invertver v. micro-inverter

Photo credit: solarreviews.com    

Micro-inverters make a home solar system more efficient, save on costs, and improve a user’s energy independence — a big trend in the adoption of off-grid energy systems. And while they are costly to install, this initial outlay is usually recouped over the course of its lifetime through energy savings and a 25-year warranty — two to three times the length of a typical string inverter equivalent. 

Expanding beyond micro-inverters, Enphase also sells a range of solar battery storage systems and electric vehicle (EV) charging kits. This is all encapsulated in the Enphase Energy System, which allows homeowners to monitor and control their energy usage through an app. What I like about the product is that it’s bringing a modern approach to energy consumption, something we’ll likely see more and more, especially with the proliferation of smart homes. The days of just getting your bill in the post and paying the number at the bottom are soon to be in the rearview. 

This is down to Enphase’s monitoring and energy management capabilities. Through its app you can monitor how your energy is being used around the house, your battery levels, and how much you’re saving. You can even optimize savings by powering your house via the electricity grid when energy is cheap, and using battery storage when it’s expensive. This battery storage is also key at times of an outage, allowing you to keep your house running when the grid is down. 

We mentioned the need for energy independence earlier on, and it has become more of a pressing matter as natural disasters have become all too common, especially in the U.S. In fact, after the Texas power crisis in early 2021, the state contributed the most newly installed solar panels in the country that year. 

Another big trend backing the stock is the incoming legislature that will favor the industry. The Inflation Reduction Act will look to pump $385 billion in funding for clean energy production and addressing climate risk over the next 10 years. We’re going to see grants, subsidies, incentives, and whatever you’re having yourself pushed on to both customers and companies to promote cleaner energy and Enphase is going to be a big beneficiary of it all. 

Unfortunately, this is where the good stuff comes to an end, as although Enphase the business seems in great shape, Enphase the stock has some issues, at least for those who haven’t owned it these past couple of years. 

While the market has been having a rough year — down 20% to date — Enphase has been flying, up 65%. This rally is nothing new though. Since the start of 2020, the stock has ascended more than tenfold. Unsurprisingly, a lot of this growth is powered by valuation expansion and, unfortunately, we’re looking at a seriously expensive stock. Enphase has a price/earnings of over 200 and a price/sales ratio in the 20s. These are premium valuations usually only reserved for the highest quality technology stocks with high gross margins, not a manufacturer. With Enphase’s gross margins coming in at the low 30s, it seems there’s a bit of a disconnect here. 

Unfortunately, with such an outlandish valuation, this casts a shadow on everything else from an investing perspective. While Enphase may be the leader in market share both domestically and internationally, I would nearly expect it to enjoy a monopoly. This is far from the case, with competitors like SolarEdge, Sunpower, Transphorm, and Red Earth Energy Storage all providing similar services across either micro-inverters or battery storage. 

Another perennial risk factor worth considering with this kind of high-tech manufacturing is the risk of innovation waning, or as I ineloquently put it in today’s podcast, de-innovation. Whether through patents expiring, key engineers leaving, or even missing the boat on the technological wave that comes to market, keeping a market-leading position in the age of disruption is always tough. 

All of these risk factors, combined with Enphase’s margin profile, just make this far too pricey a stock right now. I’m also very wary of jumping in after the run it’s enjoyed over the past few years. It does seem like something has to give sometime soon. This does not discount investing in Enphase down the line, but I fear it is not justifying its valuation in this current moment, no matter how future relevant it may be.

 

MikeMike

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