SolarEdge Technologies (NASDAQ:SEDG) and Enphase Energy (NASDAQ:ENPH) have more in common than just their founding years. Both the companies offer products that aim to maximize power generated from a photovoltaic system. As pioneers in this segment, both enjoy a growing customer base as well as industry-leading margins.
What's more, both the companies are looking to establish themselves in the growing energy storage segment. Is one better positioned than the other to succeed in the competitive solar sector?
Scale, offerings, and geographic diversification
In terms of market share, SolarEdge is the bigger player. IHS Markit ranked SolarEdge as the largest PV inverter supplier worldwide by revenue in 2019. Enphase Energy ranked fourth on the list.
SolarEdge is also more geographically diversified. In 2019, a little less than half of its revenues came from the U.S. market. Europe accounted for nearly 40% of its total revenue. On the other hand, 84% of Enphase Energy's 2019 revenue came from the U.S.
While both the companies offer products that aim to maximize output from PV panels, their offerings differ in significant ways. Enphase Energy's solution to deal with inefficiencies in solar panels is microinverters -- a small inverter attached to each panel. Microinverters, though expensive, allow you to expand your system easily when needed and are thus a preferred choice for many users. Microinverters also have lower maintenance costs and better safety features compared to string inverters.
SolarEdge offers optimizers, which provide a more cost-effective solution by getting attached to string inverters. Both the offerings have their pros and cons, though microinverters are believed to be the better option, if cost isn't a consideration.
Performance so far
Since 2015, when SolarEdge got listed, the company's revenue grew at an impressive average rate of 45%. In contrast, Enphase Energy found it challenging to grow its revenues from 2016 to 2018. That changed in 2019, when the company nearly doubled its revenue. Products with improved technology, high quality, scalability, and easy maintenance contributed to Enphase's tremendous revenue growth in 2019.
As the above graph shows, even though Enphase Energy grew revenues up to 2016, the company learned the importance of profitability the hard way, when it faced a cash crunch in 2016. Over the next couple of years, it focused on bringing costs down, before returning to revenue growth in 2019. The company is in a far better shape financially now.
Enphase's spectacular revenue growth continued in 2020 as well, before getting hit by COVID-19. The company's revenue dipped 6% year over year in the second quarter, after more than doubling in the first. In comparison, SolarEdge managed to grow its revenue by 2% in Q2.
However, Enphase Energy expects robust sequential growth in the third quarter, in part supported by revenues from storage products. At its midpoint, Enphase has provided a 33% sequential revenue growth guidance for Q3, compared to just 2% growth guided by SolarEdge.
Moreover, Enphase Energy has managed to grow its margins handsomely, as the graph above shows. In addition to product improvements, Enphase Energy achieved this by a relentless focus on bringing its costs down, including by shifting its core teams to India and New Zealand.
From a valuation perspective, SolarEdge seems to have an edge. It is attractively valued compared to Enphase Energy based on forward price-to-earnings, price-to-sales, and EV-to-EBITDA multiples. Surely, both the stocks are trading at a premium compared to the market.
Slightly differentiated products, combined with huge potential market, provide both SolarEdge and Enphase enough room to grow. Enphase's revenue growth is a bit shaky so far, compared to SolarEdge's steady growth. However, while SolarEdge offers an impressive track record, Enphase Energy offers huge growth potential with an exciting products line. Past performance, scale, geographic diversification, and valuation give SolarEdge a slight edge over Enphase Energy today. However, this may change soon and is worth keeping an eye on.
Both the companies face stiff competition, which may put pressure on their margins. The future growth trajectories of the two companies will depend on their ability to quickly innovate and provide easy and cost-effective energy solutions in an evolving market. In addition to inverters, the two players' success in energy storage and management will be a critical factor in their growth moving forward.