SolarEdge Technologies (NASDAQ:SEDG) and Enphase Energy (NASDAQ:ENPH) are two of the most valuable companies in the solar industry, with market caps of $16.5 billion and $21.6 billion, respectively. That's a little odd because both occupy similar places in the solar market, providing module-level power electronics, inverters, and monitoring devices for residential solar projects.
In many ways, they're fighting for the same piece of the solar pie. As a result, the more of their market the two of them control, the more they'll be competing against each other for growth. And that could make at least one of them overvalued.
Fighting for the same customers
SolarEdge's core products are power optimizers that are attached to solar panels, and inverters that convert the DC power those panels produce into the AC power used in our homes and businesses. Enphase Energy makes microinverters that perform the DC-to-AC conversion at the individual solar panel level.
Any given solar installation will only need one of these companies' products, not both. Thus, competition between them in the residential solar market is a zero-sum game. That hasn't limited either company's growth over the last decade, but it could in the coming years.
According to GTM Research, the two companies accounted for 30% of the U.S. residential solar inverter market in 2013. By 2019, their joint share was up to 79.7%. Taking market share from other rivals allowed both to grow, but there's not much left to take except from each other.
Another thing to keep in mind is that residential solar is not exactly a growth market today, at least, not domestically. In the third quarter, 738 megawatts (MW) of residential solar were installed in the U.S., according to the SEIA. That's is comparable to the just under 700 MW installed in Q1 2016. Installations vary from quarter to quarter and year to year, but overall, there's only been a small amount of growth in the rate at which residential solar is being installed.
Who is taking market share today?
Given that Enphase and SolarEdge are competing for sales, looking at their respective growth rates should tell us which one is taking market share from which. At least since the start of 2019, it's clear that Enphase has been growing more quickly.
Revenue isn't the only measure to consider. Last month, I wrote that SolarEdge is losing ground to Enphase in terms of units sold, particularly if you compare power optimizers to microinverters, which is an apples-to-apples comparison because they're both module-level components.
The overvalued stock today
SolarEdge and Enphase both have extremely high price-to-sales and price-to-earnings ratios by energy sector standards. Enphase is the more expensive stock by both metrics, but the chart above shows that there's a good reason why.
Out of these two stocks, I view SolarEdge as being more overvalued because its growth rate is slower, and it's likely losing market share to Enphase.
At the end of the day, SolarEdge and Enphase Energy are probably both overvalued given the slow growth in the pace of solar energy installations overall, particularly in the U.S. There are opportunities for growth like energy storage and international markets, but solar energy companies have never lived up to stock valuations like this, and I don't anticipate these two will either.