The microinverter portion of the solar market in which Enphase operates has proven to be extremely valuable for a variety of reasons. It can be the “brain” of a solar installation and can work with virtually any solar module for any installer. This expands the potential market for the business. The market has largely rewarded the action. But will the race last?
Why microinverters are hot
Most rooftop solar installations now should have a module-level control that can shut down the panel in the event of a malfunction to reduce the risk of fire. The inclusion of this feature changes the way solar installations are performed.
Previously, solar panels were placed on a roof and then connected to a central inverter, called a string inverter. This system should now include a power optimizer, which Technologies SolarEdge (NASDAQ: SEDG) manufactures, or a microinverter from a company like Enphase. The company’s products are primarily mandated by regulators.
SunPower gives Enphase a boost
Just because a product is mandatory doesn’t mean you are guaranteed to win the market. SolarEdge has been the market share leader for a long time and isn’t relinquishing the title anytime soon. But when SunPower (NASDAQ: SPWR) has sold Enphase its microinverter business and agreed to use it as the sole supplier of microinverters, Enphase’s market share has grown significantly.
Add to the fact that SunPower’s residential and commercial solar business is expanding in the United States and you have even more tailwind. The company has since announced partnerships with Q Cells to install microinverters at the plant. This is the kind of integration that every supplier dreams of having in the energy market.
Growth opportunities are just beginning
Most of the revenue generated by Enphase Energy today comes from the residential solar market. But this is only the beginning of the business plans. It offers an energy storage solution for residential customers and plans to expand into small solar and off-grid solar storage businesses. These are markets that could increase its usable available market from $ 3.3 billion last year to $ 12.5 billion in 2022.
These are natural product extensions for a microinverter business and may be of interest to some installers who are looking for a one stop shop for their integrated solar components.
Has Enphase gone too far too fast?
After its rapid ramp-up, Enphase’s action is costly in every way. Stocks trade 34 times earnings and nearly 11 times sales, which is rich for a renewable energy stock. But the power electronics sector at the module level has proven to be a source of added value for the solar industry. The growth of SunPower, Q-Cells and other partners could continue for many years.
While I think Enphase’s stock is very expensive, it is a well-positioned company with valuable partnerships. Its growth may not keep pace with last year, but that doesn’t mean it won’t be a good move for long-term investors. And that’s why I think the action is a buy today.