Slowdown in European Rooftop Solar Demand Weighs on Enphase's Outlook

Equity Analyst

Brett Castelli

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Enphase is the world leader in microinverter technology for distributed solar systems.

The inverter is often referred to as the brains of a solar system. Its purpose is to convert direct current produced by solar panels into alternating current used by households/grid and optimize energy production. Broadly, there are three kinds of inverters serving the solar market: string inverter, central inverter with power optimizer, and microinverters. Simple string inverters typically serve the utility-scale market, while power optimizers and microinverters are more prevalent in rooftop markets. 

Enphase is in the midst of a transition from a microinverter company to selling home energy solutions. Enphase targets to create a one-stop shop for solar installers: microinverters, energy storage, electric vehicle charging, and digital services for installers and homeowners. We like this strategy as it leverages its existing position with installers to expand its total addressable market while maintaining the company’s core end market of distributed generation. Additionally, it aligns well with our macro view of increasing distributed generation and electrification of demand.

Furthermore, the company is focused on diversifying its end markets by geography and market segment. Enphase has rapidly grown its international business in recent years. International accounted for approximately 30% of revenue in 2022, up from 20% in 2021. The company is looking to build on success domestically to expand internationally, notably in Europe, Australia, and emerging markets.

Enphase plans to introduce a microinverter for the small commercial segment in the second half of 2023, its first product outside the residential market.

Business Strategy & Outlook

We assign Enphase a no-moat rating as we lack enough confidence that the company’s current excess profits will last beyond 10 years, which is needed to justify a narrow moat.

Many components of the photovoltaic solar value chain have been commoditized as the industry has matured. Solar module firms, for example, are notorious for failing to achieve returns equal to or above their cost of capital. Inverters are a similar story, but the market is bifurcated between rooftop and utility-scale applications. Utility-scale inverters have been commoditized as project developers compete on largely one thing: price. To date, we have seen residential inverter suppliers (particularly in the U.S.) show the ability to earn excess profits. Our concern is regarding the duration this profitability will continue.

We do not perceive Enphase’s intellectual property as significant enough to support a moat. We do think competitors would find it difficult to match the company’s reliability in microinverters as it offers a 25-year standard warranty versus 10 years for many competing solutions. However, competitors can replicate similar solutions that offer much of the same functionality and features for a lower price point. The company’s microinverters have an innovation cycle of two to three years, which we do not view as prohibitively long. Many features, while Enphase may be the first to unveil, can be copied by competitors in relatively short order. 

The U.S. residential market (80% of Enphase’s 2020 sales) is subject to stringent safety regulations not seen in most other markets. While we view this as supporting high average selling prices by eliminating competition from low-cost string inverters, the regulations do not necessarily preclude a willing competitor from offering a compliant product. Additionally, we note U.S.-China tensions have made it difficult for Chinese competitors to enter the U.S. market (that is, Huawei in 2019). While this has contributed to an oligopolistic market in the U.S., we do not have enough confidence this will continue to be the case over time. 

We view Enphase’s brand with installers as its strongest competitive advantage. Enphase has a long record in the industry (shipped its first product in 2008) and its brand is synonymous with the microinverter—viewed as a premium solution by many in the industry. We think installers are brand loyal, and modest differences in price are not enough to switch brands. Savings would need to be significant in order to take market share, in our view. We doubt this can be achieved while maintaining reliability and investments in R&D. We think the quote below from Enphase’s competitor, SolarEdge, captures the installer-inverter brand dynamic well.

“And I think that it also become a little bit of a religious thing. I think that you'll find many Enphase installers that we will come and say, hey, we're cheaper and they will say, we don't care. We want Enphase, and Enphase will come to some of our customers and say, hey… and they say we don't care because we love SolarEdge.”

—SolarEdge CFO at December 2019 Credit Suisse Technology, Media & Telecom Conference

While Enphase possesses one of the strongest brands in the U.S., its brand is less known internationally where it competes with many local competitors. Additionally, international markets lack the favorable safety regulations found in the U.S. market.

We do not view switching costs as contributing to Enphase’s moat at this time. Installer-inverter supplier relationships are not exclusive, and the absence of time-intensive training for a specific brand makes it relatively easy for installers to switch. We see the potential for switching costs to increase as Enphase moves from a supplier of microinverters to a supplier of complete home energy solutions (microinverter, home battery, and software monitoring), but await further data points before attributing this as a moat source.

None

Economic Moat

Enphase Energy

Enphase Energy, Inc. engages in the design, development, manufacture and sale of micro inverter systems for the solar photovoltaic industry. Its products include IQ 7 Microinverter Series, IQ Battery, IQ Envoy, IQ Microinverter Accessories, IQ Envoy Accessories and Enlighten & Apps. The company was founded by Raghuveer R. Belur and Martin Fornage in March 2006 and is headquartered in Fremont, CA.

Earnings data Q1 2024

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Enphase Energy, Inc. is a global energy technology company, which engages in the design, development, manufacture, and sale of micro inverter systems for the solar photovoltaic industry. The firm's products include IQ 7 Microinverter Series, IQ Battery, IQ Envoy, IQ Microinverter Accessories, IQ Envoy Accessories and Enlighten & Apps. It operates through the following geographical segments: United States, India, China, Mexico, New Zealand, Romania, and Other. The company was founded by Raghuveer R. Belur and Martin Fornage in March 2006 and is headquartered in Fremont, CA.

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