Enphase (NASDAQ:ENPH ) is becoming one of the stars of the decarbonization story as everything gets electrified. With outstanding technology, it struggled in the early days to manage technology development and getting its products to market. However, with new management and a relentless customer focus, it has become a model company producing spectacular and profitable growth, new product innovations, plus recent global expansion beyond its US home market. Here I review recent developments at Enphase and consider what investors might make of a company whose share price is Tesla-like ( TSLA). I think this comparison makes sense.
Enphase has developed a reputation for exceeding estimates and Q2 earnings were no exception. What is more remarkable is that Enphase CEO Badri Kothandaraman has already foreshadowed substantial outperformance on the next quarterly earnings. This kind of reporting gives confidence that the business is in great shape and that there is a lot of room for outperformance, even in very challenging times.
Enphase ended Q2 with outperformance compared with its own targets on three key metrics : ~42% gross margin (goal 35%), 13% operating expenses (goal 15%) and 29% operating income (goal 20%). Revenue was a record $530.2 million and free cash flow $192 million for the quarter; the company ended Q2 with $1.25 billion cash.
The uptake of the new, transforming IQ product (IQ8) was 37% of Q2 microinverter shipments. This product is proving to be company defining as the IQ8 product is largely responsible for improved non-GAAP gross margin. Some have criticised delays in release of the IQ8 product but getting right means that the improved gross margin from this product reflects Enphase's focus on quality and profitability in its new products. This is an important part of why the company is improving its status in the industry. The IQ8 has 3 key new features : i) sunlight backup i.e. power continues from solar PV when the grid is down; ii) there is no limit on solar to storage ratio i.e. you can have a lot of solar and small (or no) storage; iii) sunlight jumpstart i.e. if you drain the battery overnight, the IQ8 can reboot the battery system from solar PV. These features allow Enphase to have value-based pricing (more profitable) and IQ8 is increasing the gross margins. The amazing claim about IQ8 is that Enphase expects 90% of its microinverter shipments will be IQ8 in Q2 2023!
The guidance outlook for Q3 was very bullish, mid-point $610 million revenue, a ~15% increase on Q2, even as the company struggles to satisfy demand for its products.
Amazingly for these times, Enphase supply chain situation is stable because of careful supplier management and sourcing alternate suppliers. Microinverter manufacturing capacity is 5 million across all facilities. An additional 1 million inverter capacity will be on line in Q1 2023 when manufacture in Flex's (FLEX) factory in Timisoara, Romania starts. And it was stated that should Romania's output need to double, this just requires an additional full automated line. This is fast to achieve and in the Q&A it was clear that this is already being planned to be implemented once the initial production commences in Q1 2023. Note that Flex Romania is largely for the European market. Enphase has Indian manufacture in Salcomp's Chennai facility (5 million inverters since 2020), as well as manufacture in Flex's Guadalajara Mexico and Fuyong China facilities.
Manufacturing costs are being reduced by fully automating manufacture lines. There are significant backorders on some items, such as the IQ batteries which have a 14-16 week backlog due to global logistics supplier issues. A new (third) cell pack supplier will be added next year.
Enphase is primarily a US play currently, with 80% of its revenue being US-based. While the US market is growing strongly (66% year-on-year) from both large and small solar and storage installers, Europe is growing even faster (89% year on year). There is strong demand for microinverters in Netherlands, France, Germany, Belgium, Spain and Portugal even as introduction of IQ8 microinverters is just starting in Europe. There is strong initial demand for IQ batteries in Germany with other countries planned for battery release in 2022. In Q3 Enphase expects to grow European revenue by more than 40% compared with Q2.
A number of issues are driving European market establishment. These arise from an interest in self consumption not only because power prices are rising, but also because of increased interest in home electrification (to address natural gas shortages) and growth of electric vehicles. In Germany "Sector coupling" is the buzzword which brings together heating & cooling, transport and mobility along with renewables power production. Together these issues allow home electrification. Enphase is focused on being the company that enables sector coupling.
In Latin America revenue grew 61% year on year. Enphase's Australian, Brazilian and Indian markets are on major growth paths as Enphase products get established in these countries.
For Enphase, sector coupling means a suite of products starting with microinverters to couple solar PV with the Enphase battery system, followed by integrating the batteries seamlessly with third party BEV chargers and heat pumps. This provides a single interface for homeowners to monitor and manage their energy production and consumption. Enphase is field testing the IQ8B for small business and it has acquired Californian company ClipperCreek EV charging solutions for residential and commercial customers. Given that Enphase is cashed up, expect more acquisitions of companies whose products can be integrated with Enphase solutions. Enphase will soon manufacture its own branded EV charging solutions (i.e. move and scale up ClipperCreek products to its Flex manufacturer in Mexico). A smart integrated charger will be implemented in the first half of 2023, with integration to Enphase home energy management.
A significant part of Enphase's business is focused on helping installers become more efficient and it acquired 4 companies that focus on installer efficiency issues in the past 18 months. For example Enphase acquired SolarLeadFactory in March 2022. This company provides cost effective lead services to installers, thus addressing a significant issue for the US market. Enphase has also acquired three software companies that relate to improving business for its installer network.
Enphase has 1,200 installers in its global EIN (Enphase Installer Network), The focus of this activity is to focus on quality and exceptional customer experience. The experience learned in the US is being translated successfully to European operations.
The point is that not only does Enphase seek to be the best in each of the products that it offers, but it also aims to provide integrated services in an industry that hasn't got its integration act together. Enphase's focus is on overall customer experience that helps sell integrated systems. And it really has a long view of what it needs to be providing. In the Q&A mention was made of the upcoming importance of V2H and V2G and how Enphase is well-positioned to be a significant player in this yet-to-emerge area. Enphase is already in discussion with BEV makers concerning standards that need to be put in place for bidirectionality.
Above I have indicated why I think that Enphase is an exceptional company that is on a growth path reminiscent of Tesla's opening up electrification of transport (and also energy storage). As an early investor I look back and am grateful that I didn't sell Enphase when it became a 10 bagger for me. $300 was a price target I set and now that this has been achieved, I'm reflecting again how much further the company can go. Considering what has been achieved and where the company is headed, I'm holding rather than selling. The market is a wild beast and it is probable that there will be some reversals that might offer a more attractive entry price, but given the above analysis I don't see that Enphase is going anywhere but up. Its products have global relevance and yet currently only 20% of its business is global. And the company is serious about product integration which means upselling of its products.
One doesn't lightly talk about potential share price outperformance for a company that recently exceeded its all-time high share price, but that is where I sit currently. I have taken profit with a small proportion of my holding and I keep thinking that perhaps I should sell more. However, when I consider the environment for renewables stocks generally, and Enphase in particular, it is hard to think that there is any urgency to sell currently, notwithstanding several recent Seeking Alpha articles preaching doom. One, published in mid-July, had a price target for ENPH of $110, when the share price was $200. Today it has retreated to $283.70 after recently breaking $300.
With confronting news about climate change all over the world, the need to decarbonize is becoming recognised as an emergency. After false starts, the Biden administration has succeeded with a major energy security and climate change bill which involves $369 billion spend to reduce emissions by ~40% by 2030 ("Inflation Reduction Act of 2022"). President Biden is implementing further emissions reductions measures (perhaps leading to a total of 50% emissions reduction by 2030) via executive actions to reduce vehicle tailpipe emissions, emissions from power plants and also from oil & gas wells. The above legislative and executive actions represent a tangible recognition in the US of a major shift in the energy scene and the corporate sector is engaging. This follows European recognition (REPowerEU) of the need to accelerate emissions reductions, sharpened by the Russian invasion of Ukraine. The rest of the world, including China, India and the rest of Asia, is engaged too. Of course Enphase is priced to perfection currently, but given that the next quarter's results seem baked in to outperform, I don't see a lot of downside in the near future, although as always short-term reversals might offer opportunity for the nimble investor.
I am not a financial advisor but I follow the massive transformations happening in the energy and transport sectors as global energy starts to get decarbonized. I hope that my commentary is useful to you and your financial advisor as you consider investment in this space generally and also whether Enphase might have a place in your energy investment portfolio.
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Disclosure: I/we have a beneficial long position in the shares of ENPH either through stock ownership, options, or other derivatives. 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.