If you follow the solar power market, by now you've probably heard about solar inverter leader SolarEdge Technologies' (SEDG 2.81%) implosion. As the global economy weakens, SolarEdge saw the need to cut its guidance for third-quarter 2023, which it will fully report on Nov. 1. SolarEdge's quarterly revenue projection could drop as much as $200 million from its previously stated expectations to just $720 million to $730 million, and GAAP operating income is swinging to a loss of as much as $28 million.
High-growth solar inverter peer Enphase (ENPH 3.80%) is getting clobbered again in sympathy with SolarEdge's ugly update. Does SolarEdge's woes spell doom for Enphase's growing residential solar empire?
A few key differences between SolarEdge and Enphase
SolarEdge is the top seller of solar inverters as measured by revenue. A solar inverter is an electronic device that converts power generated from a solar panel to usable electricity in a home or commercial building.
Enphase is not far behind SolarEdge on revenue and it has been scooping up market share, especially in the residential solar market in the U.S.
Data by YCharts.
But before assuming Enphase is toast because of SolarEdge's terrible quarter, it's important to understand some differences between the two companies.
Enphase's advantage is its microinverters, smaller inverters that sit just behind each individual solar panel to optimize power conversion. In contrast, a SolarEdge system has just one inverter (known as a string inverter), and it can rely on power optimizers (far more simple devices that "condition" the voltage before heading to the inverter) behind each solar panel.
There are also differences in the types of end markets SolarEdge and Enphase address. In 2022, SolarEdge reported about a fifty-fifty split (on a total-megawatts-of-power basis) between sales to residential customers and commercial customers. By the second quarter of 2023, the split had skewed to 60% commercial and 40% residential. More recently, SolarEdge developed inverters for utility company-grade inverters, which will put it in closer competition with big industrialists like General Electric, Siemens, ABB, Mitsubishi Electric, and others.
In contrast, Enphase focuses primarily on residential solar, with a bit of sales coming from the small commercial building market. Both companies also tout full renewable energy systems that include solar energy system management via an app, battery backup, and electric vehicle chargers.
There's one other key difference between these two companies: Geographical revenue mix. SolarEdge, based in Israel, reported 75% of its sales (again, on a megawatts-of-power basis) to Europe, up from about 57% for full year 2022. Enphase doesn't report specific geographic breakdowns of its sales, but it's implied that most of its systems are deployed in North America, with a big chunk (perhaps about one-quarter) of revenue coming from California in particular. Enphase is still in the early stages of expanding into Europe and other parts of the world.
In short, given the differences between these two companies, SolarEdge's recent financial downgrade won't automatically mean a similar downgrade for Enphase. Perhaps the market is overreacting at this point, but we'll have to wait and see what kind of pain is in store for Enphase.
Solar's day in the sun coming to an end?
Nevertheless, it's clear now that SolarEdge and Enphase expansion is coming to an end, at least for now. High interest rates, spurred on by the U.S. Federal Reserve's rate hikes to try to tame inflation, are only just beginning to have an effect on industries like solar, where financing is often an important factor in purchasing a power system.
I'm of the opinion that this will be a temporary downturn for the solar market. Legislation like the U.S. Inflation Reduction Act that supplies funding for things like solar will provide a floor for this market, but it's unclear at this point how deep the downturn will get before bottoming. SolarEdge's warning demonstrates this, and Enphase could likely revise its Q3 guidance downward as well. I no longer expect a quick snapback in activity as we enter 2024.
The good news for Enphase, though, is that it had far better profit margins than SolarEdge did -- despite being the smaller of the two companies. I think Enphase might be better able to manage a cycle of declining sales and lower profit margins as a result.
Data by YCharts.
Since it appears we are in the early stages of this solar power market downturn, it looks far too soon to buy the dip in Enphase stock. I'm staying on the sidelines for now but will continue focusing on top semiconductor stocks like ON Semiconductor that supply parts that inverter makers like SolarEdge and Enphase need.
