Enphase Energy Poised To Go Large As Solar Approaches Global Tipping Point (NASDAQ:ENPH)

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xavierarnau

Current trends in the sustainable energy market indicate demand in rooftop solar, for both residential and commercial properties, is about to explode. Add to this trend geo-political turmoil that is roiling energy markets, not just in the U.S. and Europe, but the world over. And then consider the complete energy independence provided by solar panels hooked up to microinverters (an electric relay system, i.e., the wiring). In addition to dramatically improving the efficiency of solar panels, microinverter technology allows the homeowner the ability to redirect solar energy from the local power grid to a home battery in the garage at the flip of a switch. Homeowners with this option are immune to a catastrophic power grid failure such as the one Texas suffered in the winter of 2021. In fact, this may be why the Lone Star state shot to the top of the national ranking of states that installed solar panels in that year.

Enphase Energy (NASDAQ:ENPH) is uniquely positioned to profit from a solar energy bonanza due to its proprietary microinverter technology. While this stock has risen 54% since the beginning of 2022, the fact the company is providing a crucial, proprietary technology to a global solar market that is on the verge of a tipping point means this small Fremont, California-based company still has plenty of room to grow.

How microinverter technology will increase the adoption rate of solar panels

Microinverters lower the price of solar energy by hooking up each solar panel to alternating current (AC) as opposed to connecting panels via direct current (DC) before routing the energy to a circuit breaker box. Not only do microinverters make the circuitry of solar panels far more efficient in gathering energy, it eliminates the problem of the DC-wired solar arrays that stop operating in toto when just one solar panel is shaded or covered by debris. When each solar panel is connected to a microinverter, if one panel is obstructed, all the remaining panels can still collect energy and send it to the local utility grid or a home battery.

The other advantage that microinverters provide to the homeowner is the ability to easily re-direct solar energy from the local power grid to a battery in the garage, and back again at will. Solar panels that are not attached to microinverters are at risk of losing their power in the event of a local utility grid failure.

Solar PV module shipments

U.S. Energy Information Administration

Average Value of solar PV Module

U.S. Energy Information Agency

The two graphs above show how solar panels are increasing in popularity even as they are dropping in price. The sales of solar PV modules rose an impressive 489% over the past decade. Allied Market Research predicts that sales will continue to rise by at least 20% year by year through 2026, but that calculation was made in 2019. Recent global events-like spiraling energy costs due to the Ukraine war, and increasingly harsh weather conditions that bring colder weather in the winter and heat waves in the summer-are likely to steepen the rising curve of solar energy adoption in the US and around the world. That, and the $369 billion in U.S. government funding that is likely on its way to the US clean energy market.

While the price of solar panels has dropped 66% over the past decade the price of natural gas has risen 166% over the same time frame. The chart below illustrates, not just the overall rise in the price of natural gas, but the erratic, unpredictable nature of the price fluctuations. It’s hard to know why natural gas rose 226% in the two-year interval from April 2012 to February 2014. Or why it dropped 74% over the next two years from February 2014 to March 2016. We can pretty much gage the recent stratospheric 453% rise in gas prices from June 2020 is due to the end of the COVID pandemic shut down, and the war in Ukraine, but nonetheless, who can say why the price of natural gas dropped 35% from June 5-26, and snapped back just as quickly in July? One of the biggest advantages of sustainable energy sources, like solar power, is price stability.

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Natural Gas Historical Price Chart (Finance.Yahoo.com)

While the price of natural gas is still lower per kilowatt-hour than the rooftop solar panels used today, the International Energy Agency claims that “the world’s best solar power schemes” once implemented, are now less expensive than gas and coal in most major markets around the world.

Market trends for solar panel adoption

Liberal versus conservative politics is no longer an indicator of which states install the most solar panels. Out of the top five states for solar energy adoption, only California is considered a blue state, the others four are either red or purple states.

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State Solar Investment Table (Author created chart; Data from Solar Energy Industries Association (SEIA))

It seems the liberation of getting off the proverbial grid entices conservatives as much as reducing green-house gases entices liberals. This could be bad news for the fossil fuel industry, which has long sought out conservative politics as a type of safe harbor for their business model. Notice that just these five states spent an impressive $131.5 billion on solar technology in 2021.

West Virginia is the perfect example of a reddish state embracing solar energy. It is likely Sen. Joe Manchin (D-WV) did a 180 degree turn in regard to his stand on Congress’s recent climate spending bill in response to a blizzard of phone calls from West Virginia constituents who were far more interested in bringing clean energy jobs to their state than saving the obsolete West Virginia-based coal mining industry. This, in and of itself, is a watershed moment for the solar market.

Solar Panel Innovations That Could Disrupt the Industry

The solar panel industry is on the verge of undergoing a series of disruptive technological innovations. It’s generally known that solar panels could be far more efficient, and less expensive to produce, than today’s current solar panel technology. Of the numerous solar panel upgrades already in the works, it will be difficult for solar panel manufacturers to know ahead of time which of these technologies are disruptors that will take the market by storm and which will fall by the wayside. Companies that make the wrong choice could take a big hit to their bottom lines, or even go out of business.

Perovskite Solar Cells (PSC)

When solar engineers began researching the potential of PSCs in 2006, their fragility restricted their lifespan to just a few minutes. In 2017, researchers experienced a breakthrough in the development of a PSC that could stand one year of stress testing. They managed to increase that amount 5-fold by 2022. If developers can keep up this momentum, super-efficient PSC solar panels with a lifespan of 25 to 30 years could be available within the next decade. PSC panels require far less energy and materials to manufacture than conventional solar panels made from silicon glass. This will lower the cost of manufacturing, which will fatten margins for solar tech manufacturers even as it drops the price per kWh for customers.

Solar Thermophotovoltaic Device (STPV)

Researchers at MIT are developing solar panels that capture infrared radiation (a.k.a. heat) as well as solar energy. Once fully developed, these panels are projected to double the efficiency of solar arrays which could dramatically drop the price per kWh. These panels will gather heat energy via an added layer to the solar panel, and convert it to light. This light is kept at a specific temperature in order to convert it to an ideal wavelength to be captured by a nearby solar cell.

Solar Roof Shingles

Tesla (TSLA) is currently developing solar roof shingles that will cost somewhere between $39,800 to $48,700 (before incentives are applied) for an average sized home. While this is considerably more expensive than the $11,144 – $14,696 that it costs to install conventional solar panels, the price of solar shingles could drop over the next decade as a result of further innovations and economies of scale.

These emerging solar technologies, along with others currently in the works, could prove disruptive to solar companies that are geared toward making conventional monocrystalline and polycrystalline solar panels.

Why Enphase Energy is a better bet than a solar panel company

Unlike the highly complex emerging solar panel technologies, microinverter technology is comparatively simple and straight forward. Microinverters are a simple matter of wiring each individual solar panel to a circuit box, as opposed to string inverters that wire all of the solar panels together and then route the energy to a circuit breaker box (much like old-school Christmas tree lights). Not only is it unlikely that this technology will be disrupted over the next couple of decades, it is very likely that, much like headlights on the 20th century’s first automobiles, microinverters will become a crucial part of every newly installed solar array. Enphase energy invented microinverters and has already taken the field in this technology. It’s unlikely competitors will catch up.

Why Enphase Will Beat the Solar Market

Based in Fremont, California, Enphase Energy was the first company to introduce proprietary microinverter technology to the solar industry in 2008. Within two years the company managed to install their microinverters on 13% of U.S. residential solar systems. By 2020, the company had not only upped that to 48% of all installed residential systems in the US, they managed to capture 72% of the global microinverter market.

Enphase’s primary innovation was to add microinverters, roughly the size of an internet router, to each individual solar panel in an array. This solved the primary problem of the conventional string inverters, which reduce the electrical production of each solar panel to the panel producing the least amount of electricity in the array, such that if just one panel is obstructed, the entire array ceases to produce energy. Resolving this issue by using microinverters to route energy from each individual solar panel dramatically increases the power output of any given solar array. Enphase Energy also designed their microinverters to easily switch the solar power from the utility grid to a home battery, something the string inverters on their own cannot do.

While string inverters are less expensive than microinverters, the fact their warranties last only 8 – 12 years, while the microinverter warranty lasts 25 years, means that most homeowners will likely be spending more money on the far less efficient string inverters in the long run

Enphase Energy’s Financials

Enphase Energy stock is full of surprises, mostly the good kind. The company beat EPS estimates by an impressive 29% this quarter, and this is nothing unusual. As you can see from the table below, Enphase has consistently beat estimates by generous margins for the last 4 quarters.

Table with blue header

Author created table; Data from Zacks.com

Due to its recent vertical rise Enphase Energy has a very high P/E ratio of 198.48. Hi P/E ratios are not unusual for high tech companies that dominate a rapidly growing market. Tesla’s P/E ratio was as high as 1102.61 as recently as 12/31/2020. Moreover, Tesla’s EPS was negative from 2011 until the second quarter of 2020. Not only is Enphase’s EPS in the black, it has risen steadily over the last four quarters as shown in the table above. Enphase Energy’s debt-to-net-worth ratio is also quite high at 4.4, but not as high as Apple’s (AAPL), which is 4.8.

Enphase Energy has overtaken its closest competition, SolarEdge (SEDG), in just a couple of years. In January of 2019, Enphase controlled 24% of the inverter market share, as compared to SolarEdge’s 56%. But as of December 2020, Enphase had captured 48% of the market as opposed to SolarEdge’s 40%. These are the most recent statistics available. If Enphase continued this trend, it’s likely it now controls over half the market.

The 2022 year-to-date chart below shows Enphase Energy’s performance compared with the overall solar sector, and the general market since January. Enphase Energy is represented by the blue line, Invesco Solar ETF (TAN) is represented by the purple line, and the S&P 500 is represented by the pink line. Notice that both the solar sector and Enphase Energy have performed better than the S&P, but investor enthusiasm for Enphase Energy has sent its stock soaring above both the solar industry and the overall stock market.

Yahoo chart with three lines

Enphase Energy vs Invesco Solar ETF vs S&P 500 (finance.yahoo.com)

Global solar demand will increase 30% this year alone, and will likely increase annually by double digits through 2025, according to Bloomberg. The recent passage of the 2022 Inflation Reduction Act could send solar demand in the US even higher.

Risks Associated With Enphase Energy

As mentioned above, both Enphase’s P/E ratio and debt-to-net-worth ratio are unusually high at 198 and 4.4 respectively. Investors should take this into account before buying this stock.

Enphase’s stock has recently soared on the double good news of beating its EPS estimates this past quarter, as well as the imminent passage of the 2022 Inflation Reduction Act. This rapid run-up in price is likely to retrace somewhat before continuing on its rise.

Furthermore, since the 2022 Inflation Reduction Act has already been priced in, the stock could drop back if the legislation fails to pass.

Another looming threat is that Enphase Energy stock could drop along with the rest of the stock market in the near future. Even though the stock market has rallied hard this past July, in the wake of two consecutive quarters of economic contraction, and ongoing inflation matched with the Fed’s determined quantitative tightening, Enphase’s stock could get caught in the market riptide if the Dow, Nasdaq, and S&P 500 continues their downward slide.

Summary

Enphase Energy is well positioned to profit from the coming tipping point of solar power. While its proprietary microinverter technology adds roughly $1,000 to the cost of a rooftop solar array, that cost is usually offset by energy savings over the life of the solar panels. Furthermore, the microinverter’s 25-year warranty actually makes it less expensive than its competitor, the inferior string inverters, which wear out in less than half that time. While Enphase Energy is considered a momentum stock, much like Google (GOOG) or Tesla in their early days, it is absolutely a long-term buy and hold.

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