Enphase Moving Beyond Inverters, But Can It Succeed?

Since going coming public it's been a rocky ride for Enphase Energy (NASDAQ: ENPH  ) and its investors. The stock sank quickly after the 2012 IPO only to recover and recently hit all-time highs.

But along the way financial losses continued to flow, and there seems to be no end to margin pressure in inverters the company produces for the solar industry.

ENPH Net Income (TTM) Chart

ENPH Net Income (TTM) data by YCharts.

That's why the recent news that Enphase is moving into the operation and maintenance of solar systems is such a transformational development for the company. It offers a new revenue stream and brings new value to the company's inverters. The questions is whether Enphase can differentiate itself from its competitors.

Financing of solar systems like this one is a quickly evolving space. Source: SunPower.

What Enphase is doing
The first major move outside of inverters for Enphase is an operations and maintenance offering for systems financed by Mosaic, a peer-to-peer solar finance company that offers loans to homeowners. One thing that's been lacking from the loans -- but included with leases -- is operations and maintenance so homeowners can switch to solar power without worry.  

Enphase is using its monitoring capabilities to make sure the systems it services through the Mosaic partnership operate as planned. If they don't, Enphase sends out a crew to solve the problem either from its own fleet or through a third party.

Mosaic hopes this offering eases the friction of choosing a loan over a lease for installing solar, and for Enphase the cost is rolled straight into the up-front financing costs. It's an interesting move, but the question is whether a company like Enphase can really make a dent in this market, even if it is an early mover.

As communities go solar, scale is becoming increasingly important. Source: SunPower.

If successful, competitors will notice
The challenge for both Mosaic and Enphase is that they're new entrants in a market with big players. SolarCity (NASDAQ: SCTY  ) is the big dog in residential solar, and while it focuses on leases now the company could easily transition to loans and also offer operations and maintenance. SunPower (NASDAQ: SPWR  ) recently signed a $200 million loan deal and has installed more solar systems with loans than Mosaic has financed in its history. Then there are the dozen or more other players in the market that could offer similar loans with operations and maintenance offerings.

As SolarCity and SunPower consider what offerings will work and what won't, I have to think that they're looking into expanding operations and maintenance offerings. They already provide such services for utility and commercial systems, as well as with their leases.

The bottom line is that if Mosaic or Enphase are successful with their offering competitors will notice and have the muscle to push them aside. I don't see how this offering will be successful unless it's taken up by more installers. But most of them have the manpower to perform those services themselves.

I like the innovative thinking, but this is a business model that will be easy to copy if successful. In solar, that's a recipe for disaster.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2014, at 12:17 PM, toozie wrote:

    Excellent article on ENPH, Travis. A side question -- which aspects of SCTY's business model are difficult to duplicate? I.e., will RGSE ever gain credibility and financial strength from the (nascent) lease side of the installation business? The P/S of RGSE is 1/32 that of SCTY.

  • Report this Comment On July 24, 2014, at 12:52 PM, AdamGalas wrote:

    Solarcity seems to be masters of securing financing in several different forms.

    It's management and their deal making prowess seem to be its largest asset.

  • Report this Comment On July 24, 2014, at 12:54 PM, kevinjm101 wrote:

    Useful article, thanks.

    It's amazing how I missed this announcement. Anyway, I believe that because Enphase offers excellent hardware (inverters), informative software (MyEnlighten), and now technical support and maintenance, Enphase can really push ahead with this.

    I can see how this can be imitated, but given the quality of the offering I don't think it can be imitated easily. I've seen the MyEnlighten software first hand and it truly is useful (and cool!).

    Like I learned from The Fool, unless this changes my money is still on Enphase.

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