In considering investment in the solar industry, many will first consider the companies that manufacture solar panels. Others may be drawn to companies which lease solar-powered systems to residential and commercial customers, while others yet may consider a combination of the two. What few people consider, though, is a burgeoning corner of the solar sector. This hot little niche, microinverter technology, grew substantially in 2013, and as it continues to grow, the disruptive Enphase Energy (NASDAQ: ENPH ) is poised to benefit nicely.
Opportunity: the macro view on the micro inverter
When electricity is generated by a solar panel, it needs to be converted before it can be used on the electric grid. Traditionally, this was the job of central inverters. Also called string inverters, central inverters are connected to multiple solar panels and convert the generated electricity from direct current, or DC, to alternating current, or AC.
Microinverters, on the other hand, are connected to individual solar panels. The main advantage of microinverters is that they yield more power from the solar panels than the traditional inverters.
According to GTM Research, in 2013 the domestic microinverter market rose 46% year over year. Of the 40% of the residential market that microinverters account for, Enphase Energy accounts for more than 90%. This is not just a domestic story. According to market research firm, IHS, the global microinverter market is expected to grow fourfold by 2017. The growing adoption of microinverter technology demonstrates the substantial opportunity from which Enphase can profit.
Strengths: recent financial performance
Examining the company's most recent earnings release, one finds that Enphase performed exceedingly well in 2013; moreover, management is confident that 2014 will prove to be just as (if not more) successful. The company shipped 355 MW for 2013, which represents growth of 10% year over year. This resulted in total revenue coming in at $232.8 million -- up 7% from 2012. Management attributes this improvement to success both domestically, a 45% increase in U.S. residential installations, and abroad, a 6% increase in U.K. market share and expansion into Australia.
In Q4 2013, Enphase, for the first time, achieved a gross margin over 30%. This, in no small part, contributed to the company's success in growing its gross margin to 29.1% for the full year -- growth which management attributes to ongoing cost reductions and higher volumes. Management has also cited an overall goal of 35%-40% for its gross margin. The company is guiding for a 30%-33% gross margin for the first quarter of 2014.
Although still operating at a loss for the year, in the fourth quarter of 2013, Enphase had an operating profit of $400,000 and positive cash flow from operations of $7.6 million. This was the first quarterly operating profit that the company had ever recorded.
Ultimately, the company is still unprofitable, yet it showed improvement year over year. For 2013, Enphase had a $0.43 loss per share, but this was an improvement of about 46% over the $0.93 loss per share that the company had in 2012.
For 2013, the company achieved top line and bottom line gains while keeping its debt under control. Ending the year with $8.7 million in total debt, Enphase improved in this area too. At the end of 2012, the company's total debt stood at $11.1 million. More importantly, the successful management of debt is illustrated in the company's debt-to-equity ratio, which has improved throughout the year.
Weaknesses and threats
Despite several reasons to be optimistic regarding the company's future, there are some concerns which must be addressed. For one, Enphase relies heavily on the residential market in the U.S. Unfortunately, though, Enphase has no relationship with the residential solar leader in the United States, SolarCity. At the moment, SolarCity only offers central inverters to its customers.
The rest of the solar industry is not willing to yield the microinverter market to Enphase without a fight. For example, start-up company SolarBridge recently raised $42 million in strategic and venture funding from investors -- big name investors. SolarBridge received funding from Constellation Technology Ventures, run by Constellation Energy, subsidiary of utility heavyweight Exelon. SolarBridge also poses a threat to Enphase because it has a relationship with one of the leading residential installers, SunPower.
Another weakness for the company is its inability to really penetrate the commercial market. Although it has made some headway in entering the commercial market, the gains have not been substantial, and, in reality, Enphase does not offer a true commercial product.
Foolish final words...
Recently, Enphase Energy was named one of Greentech Media's Grid Edge 20 companies -- companies which, according to GTM, serve the electric power market and "shape the market going forward with innovative products, sound market strategies and forward-looking vision."
Specifically, MJ Shiao, director or solar research for GTM Research sums up Enphase's potential: "As the pioneer of solar microinverters and, to date, the only competitor of scale, Enphase's every step signals the potential growth -- or death -- of the microinverter insurgence."
I think Enphase is a real potential winner in the solar sector, and with shares currently trading 23% below its 52-week high, today represents a clear buying opportunity.
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