Investing in a new industry can be both intimidating and confusing -- take solar. Do you opt for a solar panel manufacturer or project developer? Industry leader or unknown upstart? Perhaps a microinverter manufacturer is the best choice. Microinverters, after all, represent a growing opportunity. Greentech Media expects the global market to grow 15 percent in value in 2015 to $7.3 billion and another 9 percent in 2016. Enphase Energy (NASDAQ: ENPH), a leader in microinverter manufacturing, is looking to capitalize on this trend, and with shares trading down nearly 67% from the 52-week high, now may be the right time.
What the heck are microinverters?
Most solar power systems rely on central inverters. Connected to multiple photovoltaic, or PV, modules, the central inverter converts the generated-power from DC to AC thereby making it accessible to the consumer. The drawback here is that, like Christmas trees, if one module goes out, they all go out. Enphase, however, is an industry leader in microinverter solutions. Microinverters are connected to each individual module; therefore, if a malfunction occurs in one module, the system maintains performance.
The good ...
Enphase is a trusted name in the solar industry, and its ability to continually enter into new partnerships with developers helps it to diversify its customer base and maintain its edge. For example, although Vivint Solar accounted for 24% of Enphase's total net revenues in 2014, it recently announced that it had entered into an extended supply agreement with Enphase's competitor, SolarEdge (NASDAQ: SEDG). Enphase's management is optimistic, though, that this won't adversely affect the company too significantly. During its last earnings call, the company's CEO, Paul Nahi, said, "despite the fact that our percentage share in that customer has decreased the actual revenue dollar has increased, but the revenue dollar outside of that customer's has increased even faster."
Focusing on new partnerships, Enphase recently announced that it had entered into a supply agreement with Sunrun, the fourth largest installer of residential solar in the U.S. in 2014 according to GTM Research. It is also looking to make a greater push into the U.S. commercial market, and the fact that the company began shipping its C250 Microinverter System, which is optimized for medium and large-scale commercial operations, should help it to meet this goal. Globally, the company is making its presence known. Last quarter, international revenue was up 52% year-over-year, and showing no signs of slowing down, Enphase recently announced that it had been chosen by Euro Energy Services, a major U.K. solar energy firm, as the primary inverter technology partner for its solar photovoltaics projects.
The company is coming off a strong first quarter in 2015. Revenue, up more than 50% year-over-year, met management's estimates and grew to $86.7 million. Although it marks a drop quarter-over-quarter, the business is cyclical, and we've seen this before from the company. Management is guiding for revenue in the second quarter to come in between $100 and $105 million. Assuming it falls in the middle at $102.5 million, this would reflect 18% growth quarter-over-quarter and 25% growth year-over-year. Also encouraging is the fact that the company ended the last quarter with no debt.
Enphase is also looking to expand its offerings. In 2014, the company introduced its foray into the energy storage market and introduced a home energy management system. It has shown a willingness to make acquisitions as well, acquiring Next Phase Solar, a downstream, operations and maintenance provider.
The bad ...
There are many reasons to be optimistic about Enphase, but there are also some reasons for concern. The company is facing increasing pressure from competitors. Vivint's decision to diversify its source of inverters by partnering with SolarEdge is just one example. Elsewhere, Enphase lost market opportunity when, SunPower, a leading, vertically integrated developer of solar power systems, recently acquired microinverter manufacturer, SolarBridge Technologies. There are other manufacturers that pose a risk for Enphase, and others may emerge as the market grows larger.
Regarding the company's financials, there is cause for concern as well. Although it has been able to stabilize its gross margin around 30%, it has been unable to improve upon its operating margins for quite some time. Management recognizes this as a necessity as it continues to spend on research and development, but one wonders how long this will continue. With increased competition, Enphase will need to continue to innovate, and it will need to do so while reeling in other costs which compromise its operating margin.
Enphase is also susceptible to the looming specter of the solar industry -- government subsidies and economic incentives. Should the economic viability of developing solar power systems wane, the company, of course, would suffer greatly.
The ugly ...
If beauty is in the eye of the beholder, some investors may find Enphase's stock performance attractive.
ENPH data by YCharts
The market got a taste of the company's profitability last year when it showed positive net GAAP income for the first time -- the $800,000 of which translated to diluted EPS of $0.02. The company hasn't maintained profitability since then, and the market has shown its frustration. At the moment, shares are trading near 52-week lows, but, for some, that may provide a welcome opportunity to begin a position.
Foolish takeaway ...
There are some very encouraging signs regarding Enphase's prospects, but there are also reasons to be cautious. Nonetheless, I find the company's story compelling and believe that it will put a charge in investors' portfolios in the long run.