Enphase (ENPH) is clearly the leader of solar MLPE technology as the recent SunPower (NASDAQ:SPWR) deal signifies. Awareness of “Enphase” has doubled this past year alone, and multiple billionaires have invested in Enphase because they believe in the company’s vision of distributed energy freedom. Enphase has exceeded its 30% gross margin goal six months ahead of time, and reiterated 30-20-10 by the end of the year. Enphase is only valued at ~1.2x 2019 revenue (~$4.50 x 103M shares (incl. SunPower deal)) / 389M) and ~16x 2019 earnings, even though in record time, the management has turned the company around from mid-teen margins with decreasing revenue to where Enphase could be hitting triple digit revenue per quarter in 2019 (see revenue growth path as stipulated in Analyst Day 2018). What could help make that revenue projection a reality is the release of a disruptive product so profound that it would rock the foundations of the solar world; this product would have to be highly desired, superior to its competitors, applicable to all existing solar systems, and most importantly, it would have to offer incredible value for the price paid. Excitement is growing for this product, called IQ8 “Ensemble“, which is debuting in Q4, and that excitement is coming from veteran solar installers. Is this technology disruptive enough to catapult Enphase to levels never before reached, possibly to the Moon, Mars and beyond? Maybe, so read on to see if you agree!
Enphase could hit a home-run with IQ8, for they’ll have the price advantage with plenty of room for margin. All competing microgrid solutions use batteries to operate, but Enphase’s can work without them; this fact alone suggests IQ8 will be the lowest-cost microgrid solution. Enphase’s microgrid will ignite an “upgrade” market worth hundreds of millions, and that’s just from their customer base; there’s millions of non-Enphase customers who will also want to upgrade, and converting an optimized-string to microinverters is simple with no permits necessary; furthermore, with millions of central string inverters nearing their ~10-year lifespan and getting ready to die, upgrading those systems to microinverters with microgrid capability might offer better value to the consumer without having to mortgage the farm.
All grid-tied solar systems are “anti-islanding“, so when the utility grid fails, they shut down, for they are not allowed to export power to the grid during that “down” time for safety reasons. Solar systems do not have the ability to supply the precise amount of power just to a home’s electrical grid, and have an over-production potential, and that is why they must shut down. Enphase now has the technology to precisely control a solar system’s electrical output such that there can never be any over-production during a grid outage. Competing microgrid solutions can supply power to the home when the utility grid goes down, but it’s not the solar system supplying the power to the home, it’s the batteries; when the batteries are discharged, the solar is turned on to recharge the batteries, then the solar is shut off, then the cycle repeats. Enphase has removed the need for the battery “middleman” and invented technology which precisely controls the electrical output from a solar system to match the home’s current electrical load. It’s revolutionary and adheres to the “anti-islanding” mandate. Enphase calls the technology “grid-agnostic” because it works regardless of whether the grid is “up” or “down“. Enphase’s cofounder, Raghu Belur, says they’ve “cracked the code” with IQ8, and are years ahead of microgrid/backup/offgrid solutions currently available.
IQ technology is a major leap forward for Enphase, as well as the solar industry, and like any new technology, it has taken time to adopt, but it is now happening at a quickening pace. Installers are the key; they are switching to IQ because of its simplicity, safety and productivity increase. Enphase’s plug-n-play IQ uses only 2 twisted-pair copper wires versus the competition’s 4, and the new wiring configuration provides better PLC. Enphase’s optimization of low-voltage DC-to-AC conversion (a.k.a. the microinverter) has never been surpassed, although other companies have tried (ABB (ABB), SMA (OTCPK:SMTGF), Renesola (SOL), Enecsys, SunPower/SolarBridge, etc.). In the past 2 years, major Tier-1 panel companies have joined Enphase, with SunPower’s recent allegiance causing major tremors. Enphase’s jump to IQ was risky, but signs of its success are becoming evident at both distributor and installer levels. Once installers use IQ, it becomes their preferred solution. IQ is selling so well that one distributor recently divulged that Enphase’s sales volume even has “SolarEdge stressed out” (SEDG). IQ is a disrupting technology on its way to becoming the new standard for MLPE. From multiple solar installer feedbacks gathered, the recent response from one in Massachusetts summed up the current zeitgeist:
I have been installing Enphase microinverters since 2009. We were the only ones using microinverters in our territory. Now all our competitors switched or are switching to Enphase for residential projects. With the new IQ line, there is no reason to use anything else. It is simple and most importantly the safest. Ask any technician to choose between 400-600v DC (standard DC system with optimizers) and 240v AC (Enphase IQ). Central inverter companies were forced to use optimizers to make their systems safer. Enphase met that requirement from day 1. Central inverters are playing catch up to Enphase safety wise, but they still operate at much higher voltages. Also, Enphase pricing is very competitive now.
Some installers interviewed stated IQ8 will be a “game changer“, and like the installer’s comment above, they fully comprehend the idea of a “battery-less” microgrid, especially in terms of cost. However, some analysts have said it is nothing special and can be copied in a 3-4 year period, but considering major companies have tried to do that and failed, I’m skeptical, plus it’s late in the game to play catch-up with a product that has 10+ years of R&D behind it; furthermore, considering the Red Queen Effect, IQ optimization will continue to progress, with IQ9 already planned for late 2019. The microinverter is still a maturing technology whereas the string inverter is for the most part, matured.
Enphase’s IQ8 microgrid-backup-offgrid solution will work without batteries, so let’s consider some basic cost comparisons. A Tesla Powerwall (TSLA) solution costs anywhere from $8,600 to over $14,000 fully installed, including the gateway. An IQ8 microgrid upgrade is estimated to cost about $4,500 for the hardware (Envoy and 26 micros for 2×13 string config), and a Generac (GNRC) 10kW generator costs ~$2,000. With this major price difference, why wouldn’t budget-conscious consumers upgrade their existing solar system to Enphase IQ8 to achieve microgrid-backup-offgrid capability, then use their generator for nighttime power in a grid-outage scenario, and wait for cheap storage, possibly EnCharge? This price comparison suggests that expensive, hulking storage used in microgrid solutions may be threatened with the IQ8 alternative hitting the scene.
For 5 days after Hurricane Irma, I was pretty depressed considering the Sunshine State was living up to its name, but my solar system wasn’t, due to the utility grid being down. Still, 5 days was nothing compared to stories of being without power for 4 months after Maria in Puerto Rico. With a 20kW solar system that was in perfect working condition, like many other solar customers’ systems, my “working” home grid had to remain inoperable while the “non-working” utility grid was repaired. I wished for something economically feasible that could allow my solar system to work when the grid was down; my wish will be granted sometime in H1-2019; with Enphase’s IQ8, I will be able to upgrade my solar system so that during a grid outage, it will not shut down, and it will still be able to generate electricity throughout the day to my entire home and adhere to the “anti-islanding” mandate. Considering my system is but 1 of millions in need of this new technology, there is huge upgrade revenue potential for Enphase.
With almost a million Enphase customers, and hurricanes Harvey, Maria, Irma, and Florence still very fresh on peoples’ minds, Enphase’s new technology is debuting at a great time. People want energy freedom, and Enphase’s technology can give them that.
As a microcosm, consider Enphase’s Upgrade Program for Early Adopters that will offer “Early Adopters” the option of upgrading their solar system to newer Enphase technology (“Early Adopters” are customers with the following Enphase microinverters: M175/M190/M210/D380). The program is only available to about ~30k customers who have ~7 years left on their current warranty, and 15% have made the decision to upgrade.
The program has the following options – 1) upgrade to a powered-down IQ7 now, complete with Envoy and Q-cabling, and pay only ~$67 for each microinverter, shipping and tax (some states negate the tax for solar, such as in Florida), 2) upgrade to an AC Module solution with integrated IQ7+ now, complete with Envoy and Q-cabling, or 3) the Cadillac option – wait for Enphase’s IQ8, and upgrade your system to a “battery-less” microgrid/backup/offgrid solution.
Now consider the ~600k Enphase M215/M250/S230/S270/S280/IQ6/IQ7 customers that follow these “Early Adopters“; surely they will be interested in upgrading their solar systems to have microgrid capability; I will be one of them, and many others will want IQ8’s energy freedom capability, too; don’t we all want energy freedom if the price is right? Let’s be conservative and not consider the halo-effect that the upgraded, “battery-less” microgrid system will do for the surrounding neighbors and installers, themselves, nor the millions of non-Enphase solar systems out there. Let’s say initially ~15% of Enphase’s current base wants to upgrade, which is comparable to the 15% of the 3% of “Early Adopters” polled in their new program that want to upgrade – that’s ~100k customers times ~24 microinverters per average household at ~30% margin which is ~$72M in revenue; this represents a new “upgrade” market, one that up until now has had no serious fundamental analysis and has not been easily understood since the advertised average 20-year panel lifespan is 39 quarters beyond the average analyst’s 2-quarter horizon.
Upgrading to Enphase’s IQ8 microgrid will be attractive because it 1) does not require expensive battery storage, 2) comes with a fresh 25-year warranty, 3) does not require any permitting since it is a replacement project, 4) is eligible for the 30% Fed ITC, and 5) should be able to generate more power than the original system. For existing solar systems in places like Hurricane Alley, as well as other “Alleys” around the world, Enphase’s IQ8 will be a godsend. Giving existing solar systems power during the day, regardless of the grid’s status, is half the battle (daylight 50%/darkness 50%); a cheap generator at night will still suffice for many until the cost of storage comes down. Complementing Enphase’s IQ8 is the Generac partnership which will make the option of not having storage more acceptable.
Consider that Enphase’s upgrade program is being proposed to customers whose systems are reaching ~8 years in age with a 15% conversion rate; what happens when those same systems hit ~10, ~12, or ~15 years in age? Surely the conversion rate will be higher, especially as the 2021 ITC expiration nears. Furthermore, the panel “sweet-spot” moves at ~10W per year (230W in 2013, 280W in 2018, 320W by 2022, 400W by 2030, etc) and MLPE performance moves at ~20W per year (M215, M250, S280, IQ6, IQ7, etc.), and both of these factors play a meaningful role in the upgrade decision. For example, panels degrade to about 80% production capability after ~20 years, so a 10-year-old 230-Watt panel might be at ~210-Watt efficiency now. For some customers, replacing both the electronics and the panels with much better equipment might actually achieve a faster ROI than just leaving parts of the old system up on the roof, sort of like “killing 2 birds with 1 stone“-type approach, and this is where the AC Module and IQ8 upgrade options have strong potential.
If IQ8 is a “game-changer” for Enphase, product availability will be key to its success. With news of manufacturing in Mexico by Q2-2019, this will be perfect timing for the IQ8 ramp-up. Recall that Enphase had enough capacity to produce 15k/day/line with 4 lines (Enphase Analyst Day, November 2015, p.30, shown above), and with the recent $60M notes offering, the IQ8 roll-out should be a success. Availability is important, and just consider that the Powerwall’s weak availability has been a boon for the AC Battery with its higher cost, something ACB 1.5, Enphase’s next revision to its AC Battery, due in Q4, is supposed to address.
The Enphase CEO believes in having multiple supply channels, so the Mexico news is yet another example of this management’s operational excellence. Another example of that excellence and fiscal conservatism is news from the latest SPI Anaheim. For those who have been following Enphase for years, recall that in Q1-2017, then-CFO Kris Sennesael stated that had it not been for the $1.5M SPI expense, Enphase would have been profitable. For SPI this year, Enphase was an exhibitor, but in reality used its partners’ muscles (Panasonic, Solaria, CED Greentech and BayWa r.e.) to exhibit its products and wisely saved on OpEx.
Enphase’s microinverters continue to have production cost reductions (Enphase Energy Investor Presentation, March 2018, see above), and the string inverter dinosaur will eventually be pushed to extinction, especially with price-parity having been reached in both Europe and the USA:
(Europe pricing, Winkelman, 9/27/2018)
|SolarEdge P370 Power Optimizer||$507 Euro|
|SolarEdge SE4000H||$758 Euro|
|SolarEdge 20YR warranty extension||$235 Euro|
|13 panels, ~4kW AC||$1,500 Euro|
|Enphase IQ7+ Microinverter – 20YR warranty||$1,274 Euro|
|Envoy-S Standard||$189 Euro|
|13 panels, ~4kW AC||$1,463 Euro|
(USA pricing, Renvu, 9/27/2018)
|Enphase IQ7+ Microinverter – 25YR warranty||$1,430|
|13 panels, ~4kW AC||$1,845|
The MLPE market will evolve with Tier-1 panel companies like SunPower, Panasonic (OTCPK:PCRFY), LG (OTC:LGEAF), Jinko Solar (JKS), and Solaria already collaborating with Enphase to produce AC Module products; they chose the microinverter leader to pair their solar panels with. As IQ technology evolves, this may be the wisest choice because microinverters deal with DC-to-AC conversion at the lowest common denominator which is the individual DC power source itself, the solar panel, and this gives the most optimal safety and product longevity, and guarantees the solution will be PID-free, something high-voltage DC solar systems are susceptible to.
Enphase’s patented technology allows the microinverter to be easily detached from its partner’s solar panel. Competing AC Module products have a bolted-down microinverter which presents an inferior service scenario, as well as a potential cooling issue. Many installers prefer installing separate components, so with an Enphase AC module, that criteria is still met. AC Modules result in a ~30% faster installation, eliminating potential costly mistakes on the roof. Enphase’s AC Modules are a major improvement and simplification over the competition. At SPI this year, Tier-1 panel partners, Jinko Solar, Panasonic and Solaria showed off their AC Modules with integrated Enphase IQ7’s, and SunPro Solar, a major national solar installer, announced its allegiance to Enphase’s IQ. Evolution in the solar industry is happening before our eyes, and many solar installers have switched entirely to AC Modules, like SanDiego Solar that installs only LG NeON-2 ACe’s; with the recent USA-Korea trade deal reached, the LG ACe should see revisions coming forward, possibly IQ8 NeON-2 ACe’s out of the Huntsville, Alabama, plant.
In summary, the Federal ITC is active through 2021, so as that date nears, solar business will continue to pick up speed and upgrade fever should increase. California’s solar mandate starts in 2020 with SunPower and Enphase as major benefactors in the homebuilder market. SunPower just got its long-awaited tariff exclusion, which is also good news for partner Enphase. The fate of SolarWorld in Oregon should be decided soon with the potential for low-cost P-series ACM’s firing off the assembly line (note: the SolarWorld IQ6+ ACM had been ready for sale when bankruptcy hit in 2017). With the Mexico news, Enphase’s product availability has been given a good shot of insurance. In our tariff-based world, it’s Huawei that might be shut out of the USA market (Jinko Jacksonville, LG Huntsville, Panasonic Buffalo, Solaria Fremont, and SunPower Hillsboro); even SolarEdge might have a shipping disadvantage to Enphase. Regardless of the geo-politics, Enphase is not tied to venerable, centralized-string technology; instead, they are leading the superior DG opposition with its band of partners. Enphase’s IQ technology is the disruptor in the market, especially with IQ8’s “battery-less“, grid-agnostic capability, which will cure existing solar systems of their “anti-islanding” sickness and build brand new ones having complete immunity. Lowest-cost energy freedom is coming with IQ8, and 2019 will be another exciting year for Enphase. Let’s hope in the coming Q3 earnings call that Enphase can show Wall Street it can meet or exceed revenue of $76-82M, and then the shorts can disappear. Good luck, Longs.
Disclosure: I am/we are long ENPH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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