Harnessing limitless energy - Solar

Everyone’s talking about clean energy. Politicians are debating over the level of tax credits people should be incentivized with. Companies are increasingly talking about sustainability. Younger demographics are concerned about climate change. In a PEW research poll in 2021, about 33% of GenZers, 28% of millennials have made an actionable investment in climate change like donating money or volunteering to the cause. 71% of Americans say they should prioritize the development of alternative energy sources over expanding the production of fossil fuels, such as oil, coal, and natural gas.

Okay, so the trend appears to be clear over the long term. The companies which could benefit from this would be those in the solar sector, battery manufacturers, and EV companies.

Let’s talk Solar.

Harnessing solar has been around for centuries. In the 7th century B.C sun’s rays were used by humans with a magnifying glass to light a fire. 1839, French scientist Edmond Becquerel invents the first photovoltaic cell. Come 1958, space satellite radios are powered using solar panel arrays. Residential solar panel installations are on an upward trend. Solar panel costs have collapsed from $300 /watt in 1956 to about $0.5 / watt today.

String or central inverters have been widely used in recent times. Solar panel arrays in series are hooked up to a central or string inverter, which converts D.C. power in the solar panels to AC power used by home appliances. It’s the incumbent as far as solar panels go.

This is where it gets interesting. The string inverter is limited by the power generated by the least performing solar panel since the arrays are in series. If there is a tree shade, leaves on the panel, dirty panels, or it’s partially cloudy near the roof; the power output of the string inverter will be limited by the least performing solar panel.

Efficiency is Key

Microinverters solve this problem. Each solar panel is connected to a microinverter instead of a central inverter for current conversion. The total output is not limited by the least performing solar panel. This can over time lead to more than a 10% difference in the power output of the inverters. There are additional advantages. There can be higher voltages on the roof with string inverters ranging from 100-1000V while in microinverters the DC-AC conversion occurs on the panel level. So the voltages on the roof hardware are <60V making it safer for electrical hazards

This is where Enphase Energy (ENPH) comes in. They were the first to successfully commercialize the solar micro-inverter, which converts the direct current (DC) power generated by a solar panel into grid-compatible alternating current (AC) for use or export. Since then they have now expanded into battery energy storage and EV charging stations primarily for residential customers. However, the microinverter is where the bulk of Enphase sales come from.

Enphase primarily uses its website as a sales engine to residential customers. They partner with solar panel manufacturers and installation companies to set up their systems in your home. Here is a peek into their organic searches over the past year.

Enphase has experienced significant growth in recent years. In 2021, the company's revenue grew by 55% to $1.9 billion. In 2022, revenue grew by another 54% to $2.3 billion. The company's growth has been driven by a number of factors, including the increasing popularity of solar energy, the growing demand for battery energy storage, and the company's strong brand reputation.

Enphase's annual reports for the past two years provide a glimpse into the company's future plans. In the 2021 annual report, the company stated that it plans to "continue to invest in research and development, expand our global footprint, and partner with leading solar installers to accelerate the adoption of solar energy." In the 2022 annual report, the company reiterated its commitment to these goals and added that it also plans to "continue to innovate in the battery energy storage market and expand our product offerings."

The tailwinds

The inflation Reduction is a tailwind for their business as it increased tax credits from 26% to 30% for homeowners who install solar panels until 2032. So if you’re a homeowner who just installed a $18000 solar panel, you can get up to $5400 in tax credits. This should reduce the ROI timeline for solar installations. Currently, the return on investments with solar panels can be 7 - 10 years.

Enphase Annual Reports:

• Revenue growth: Enphase's revenue has grown significantly in recent years, driven by the increasing popularity of solar energy and the growing demand for battery energy storage.

• Profitability: Enphase has been profitable in recent years, and its margins have improved.

• R&D investment: Enphase continues to invest heavily in research and development, which is essential for maintaining its competitive edge.

• Global expansion: Enphase is expanding its global footprint, which will help it to reach new customers and grow its business.

• Partnerships: Enphase is partnering with leading solar installers to accelerate the adoption of solar energy.

• Battery energy storage: Enphase is expanding its product offerings to include battery energy storage, which is a growing market.

• Vision for the future: Enphase has a clear vision for the future, which includes continued innovation and growth.

The numbers in the image are in multiples of thousands.

The company's growth was driven by the increasing popularity of solar energy and the growing demand for battery energy storage. Enphase continues to invest heavily in research and development, to maintain its competitive edge. The company is also expanding its global footprint and partnering with leading solar installers to accelerate the adoption of solar energy. Enphase is well-positioned for continued growth in the years to come.

The Upside

• The global trend towards renewable energy: The world is increasingly turning to renewable energy sources, such as solar, to meet its energy needs. This trend is likely to continue in the coming years, as governments and businesses around the world look to reduce their reliance on fossil fuels. Enphase is well-positioned to benefit from this trend, as it is a leading provider of solar microinverters.

• Strong demand for Enphase's products: Enphase's products is in high demand, as they offer several advantages over traditional solar inverters. For example, Enphase's microinverters are more efficient and reliable, and they can be easily installed and monitored. This has led to strong growth in Enphase's sales and revenue in recent years.

• Positive financial results: Enphase has consistently delivered strong financial results. In the most recent quarter, the company reported revenue of $726 million, up % year-over-year. Net income was $100 million, or $1.46 per diluted share, up 153% year-over-year. These results demonstrate the company's strong financial health and its ability to generate profits.

• Positive analyst sentiment: Analysts are bullish on Enphase. The company has a consensus "Buy" rating, with a price target of $350. This suggests that analysts believe the stock has the potential to rise by more than 50% from its current price.

• Technical advantages: Microinverters are safer, more efficient when it comes to power output, don’t have a single point of failure, and are easier to install compared to string inverters.

• Warranty: Enphase microinverters offer a higher warranty period of 15 years and are extendable to 25 years compared to a 5-10 year warranty from string inverters.

The Downside

• The overall solar market could slow down. The global solar market has been growing rapidly in recent years, but there are some signs that growth could be slowing. For example, the International Renewable Energy Agency (IRENA) projects that global solar capacity will grow by 16% in 2022, down from 20% growth in 2021.

• Enphase is facing increased competition. The solar industry is becoming increasingly competitive, and there are several other companies that manufacture microinverters. If Enphase is not able to maintain its competitive advantage, it could lose market share to its competitors.

• Enphase could be affected by changes in government policy. The U.S. government has been supportive of the solar industry in recent years, but there is always the possibility that this could change. For example, the Trump administration-imposed tariffs on solar imports from China, which could have a negative impact on the solar industry.

• Macroeconomic conditions can impact sales in the near-term future as the US battles default and the risk of reduction in consumer spending due to federal reserve’s credit policies. This can present significant headwinds for the company in the year 2023.

• Overpriced stock: While it is true that solar has a lot of potential and will continue to grow over the next decade, a lot of future earnings growth is already factored into the stock as the stock is already trading well over 48 times its earnings as of May 24^th, 2023.

• Cost disadvantages: Microinverter installations can cost about $1000 higher compared to string inverters on average residential homes.