If you’ve noticed more solar installations in your neighborhood and in your travels recently, it is because the industry is experiencing strong double-digit growth. Total installed PV capacity in the U.S. is expected to increase by 14% in 2019. The global solar panel market is expected to increase at a CAGR of 24% by 2024.
Enphase Energy (ENPH) is poised to benefit from this growth as they are a leader in safer and more efficient solar technologies. Currently, Enphase sells microinverters and AC storage products to solar installers, distributors, and OEMs. However, Enphase is transitioning the business to be more of a home energy management company. The company has advanced their technology to the point where they produced the first truly grid-agnostic solar energy system.
The picture above shows Enphase’s microinverters being installed which sit behind each solar panel enabling each panel to operate independently.
Most solar installations currently on the market do not operate when the power from the utility company goes out. Enphase solved this with their Ensemble 1.0 energy storage product. The Ensemble 1.0 contains IQ8 microinverters as part of the AC battery storage system. The new IQ8 microinverters (inside the Ensemble storage product) work along with the Encharge battery, the Enpower, the IQ combiner, and the Enlighten cloud to make up the Ensemble 1.0.
The Ensemble system senses power outages and isolates the Enphase system away from the grid connection. Therefore, the Ensemble becomes the source of power during power outages. This system is scheduled to be initially launched in Q4 2019, with a ramp-up expected in 2020 for the residential market.
The Ensemble system is compatible with IQ6 and IQ7 microinverters installed on the PV side (under the solar panels). So, the Ensemble 1.0 can be marketed to those who already have IQ6 and IQ7 microinverter installations.
The Ensemble system can be viewed as an alternative to traditional back-up generator systems. Of course, consumers get much more than just a back-up power system with the Ensemble. They are getting a complete home energy management system that helps lower their utility power consumption. Owners of the system have software that works with the hardware to view usage stats at the appliance level and at the breaker level.
Enphase’s microinverters have significant advantages over traditional string inverters. The traditional string inverters are kind of like a string of Christmas lights where if one light goes out, the entire string of lights fails. If one solar panel is in shade or is covered in dust, leaves or bird droppings, the traditional string-based system’s performance drops to its lowest performing solar panel. For example, if one traditional solar panel is 50% blocked, then the entire system only runs at 50%.
The Enphase microinverter systems enable each solar panel to operate independently. So, if one panel was 50% blocked, all of the other solar panels operate at 100%, with only one panel operating at 50%. This gives Enphase systems higher reliability.
The traditional string inverter systems can have up to 1,000 volts of DC power on the roof. This presents a higher risk of fire if arcing occurs. Enphase microinverter systems mitigate this risk because DC-AC conversion occurs at the panel level. Therefore, DC voltage never exceeds 80 volts with Enphase microinverter systems. There is no high-voltage traveling through the system, which makes Enphase systems much safer.
Other benefits of Enphase microinverters over string inverters include: longer warranty (25 years over the competition’s 10-12 years), quicker system diagnosis/lower maintenance (less emergency truck visits needed), higher productivity (studies show Enphase systems produce 3.1% more energy), easier/faster installation (88 minutes faster on avg.), and more flexible design (no string sizing needed/allows for multiple configurations).
Enphase’s main competitor, SolarEdge (SEDG) has technology that falls short. Solaredge attempts to improve upon the traditional string inverter through their power optimizers. The power optimizers fix the voltage of the solar electricity and send it to a centralized inverter to be converted to AC power.
Although the power optimizers have a warranty of 25 years, the string inverter that they are attached to only have a 12 year warranty and probably need to be replaced sometime during the life of the PV system. SolarEdge’s power optimizers are less expensive than Enphase’s microinverters. However, the need to replace the string inverter increases the cost of a SolarEdge system during the 25-year life of the PV system.
SolarEdge’s power optimizers do reduce safety risk by lowering the voltage before it is sent to the centralized inverter. However, the power optimizers have a less flexible design, more complex installation, lower energy productivity, and less reliability (only as strong as the weakest panel).
In a perfect world where an owner of a PV system gets full sun and gets little debris, snow, and bird droppings on their roof, a SolarEdge system can be effective. However, not everyone lives under these perfect conditions.
SolarEdge will be launching a battery storage system in 2020. However, it is not yet clear how that will compare with Enphase’s storage system.
The fact that in many cases, most home and business owners face uncertain roof conditions such as partial shade cover, pollen, bird droppings, blowing leaf and seed debris, snow cover, etc. With that in mind, an Enphase system is likely to be a better choice. For example, if one of Enphase’s panels was covered in debris, the remaining unaffected panels would still operate at 100%. The SolarEdge system would only operate at the strength of the weakest panel. So if one of SolarEdge’s panels was operating at 50%, the entire system would only operate at 50%.
Although Enphase is poised to perform well over the long-term, it may not be the ideal time to enter the stock. The stock is just beginning to pullback after a strong run up that brought the price to an extreme overbought level.
This is what I said when I first published the article for MoSI subscribers a few weeks ago before the stock pulled back: “The price action may not be sustainable at these levels. A pullback on profit taking from large investors could occur at any time. So, I wouldn’t recommend buying the stock right now. This is another company to place on a watch list to wait for a better entry point.”
Now, we are beginning to see the pullback. The RSI indicator shows that the stock’s price strength dropped below overbought levels. The MACD line is just crossing below the red signal line indicating a change in trend. Money flow is declining after reaching a high peak. So, I expect a continuation of the pullback as the stock approaches an oversold level.
The last significant dip in price (in 2018) found support around the 50-day moving average. I don’t know if the stock will drop that far this time, but it is possible as large investors are probably locking in gains from the strong run-up in price in 2019.
Enphase’s competitive advantages for their solar systems have the potential to drive strong, above average growth for the company over at least the next five years. Enphase has a good differentiator with their efficient microinverters and their off-grid capabilities with their battery storage solutions.
The risk to the investment thesis is that the tax credit for solar installations is being reduced over the next few years. In 2019, consumers can still get a 30% tax credit based on the total cost of the system. However, this drops to 26% in 2020, 22% in 2021, and 10% in 2022. It is not clear how these credits will affect solar installation growth during this time. The risk is that the reduced credits could create less growth than expected.
The good news is that the price of PV panels declined over the past decade. Many installers offer various options including solar leases and loans. This makes installations affordable for many consumers as they don’t have to pay large sums up front.
Enphase is poised for growth as they benefit from the 24% annual industry growth through 2024. The increased affordability through loans and leases may help drive this growth as solar installations allow consumers to save on their utility bills over time.
Enphase has the potential for strong above average growth as their systems have multiple benefits over standard systems. The company’s AC storage solution adds even more value that is likely to help drive this strong growth. Enphase’s systems will soon be able to run off-grid, making power outages a non-issue.
Personally, I would let the stock pull back and wait for the trend to change back up.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: The article was written by David Zanoni for Kirk Spano’s Margin of Safety investing service.
Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.