Company Overview: Enphase Energy, Inc. (NASDAQ: ENPH) operates as a microinverter-based solar-plus-storage systems provider. The company’s integrated platform contains the Enphase semiconductor-based microinverter that converts energy at the solar module level, The Enphase Home Energy Solution, an intelligent energy management and cloud-based monitoring tool. Its storage system, Enphase Encharge, has the ‘Always-On’ functionality that powers homes during blackouts. Till December 2020, ENPH shipped over 32 million micorinverters and about 1.4 million customers have used Enphase in their residential and commercial deployments with a reach of over 130 countries. Enphase Energy caters to customers in the US, Canada, Mexico, Central America, Europe, Australia, New Zealand, India, among other Asian markets. In FY20, the US market alone contributed ~82.4% to total revenues.

ENPH Details

Next-Generation Combined Energy Systems: Enphase Energy currently has seventh-generation IQ-based microinverters that support up to 450W high-power solar modules for residential and commercial installations. Consumers can pair the inverter with monofacial or biofacial solar modules that are expected to hit the market in the next three years. For this purpose, ENPH roped partnerships with top solar panel manufacturers worldwide. In North America, Enphase Energy launched Enphase storage systems during fiscal 2020 that operate as a grid-independent microinverter-based storage system. The next-gen battery storage has variants with a scalable capacity of 10.1 kWh and 3.4 kWh that keeps homes powered during the blackouts. ENPH started shipments during the Q2 FY20.

ENPH plans to launch its eighth-generation microinverter-based systems for residential installations in 2021. The all-in-one system combines microinverter, Encharge battery storage, smart switch interconnected device, communication and system control with Envoy gateway, and IoT-based monitoring software. 

Figure 1. The Eight-Generation All-In-One Energy System:

Source: Company Reports

Enphase Energy plans to enter into commercial solar and off-grid solar and storage systems through Ensemble-in-a-Box and Ensemble 2.0 (with IQ 8) suit. The systems can be deployed in water pumps that provide a reliable power supply. It is capable of producing a peak power output of 3.2kW. The portable off-grid systems have a wide variety of applications catered for developed markets and emerging Indian market. The company is expecting an addressable market size of $5.2 billion for off-grid solar and storage by 2023. Enphase is also looking to enter into small-scale solar installations with a market size of $1 billion by 2023. For residential solar, ENPH plans to grow in Europe and to enter Japan with a market size of $4.5 billion expected to reach in 2023.

Figure 2. Off-grid Solar Plus Storage Plans:

Source: Company Reports

Historical Financial Trend:

ENPH continues to expand into new geographies with international revenues (as % to total revenue) increased from 16.13% in FY19 to 17.63% in FY20. The company shipped over 32 million microinverters till date to FY20, representing ~9 GW of energy requirement. It had shipped more than 94 MWh of energy storage systems worldwide. ENPH remains committed in innovation – its storage systems are equipped with power start technology that seamlessly powers-up air conditioners and well-pumps. Its mobile app gives the ability to homeowners to go off-grid. The company partnered with various large-scale solar system providers and rooftop contractors that pushed revenue to the new heights in FY20. ENPH has a track record of consistent profit generation driven by the contract manufacturing model wherein the company’s microinverter were manufactured by Flex Ltd. ENPH added new partners for manufacturing in India and Mexico locations for its seventh-generation products that help to cut tariff.

Figure 3. Five-Year Financial Trend of Enphase Energy:

Source: Company Reports

Consumers took advantage of federal tax credits and safe harbour guidance under Internal Revenue Service during the year which resulted in a 24% growth in net revenues in FY20 over pcp. ENPH sold about 6.8 million microinverter units in FY20, up from 6.2 million reported in FY19. The launch of energy storage systems in North America also boosted the revenues. Tariff refunds from China provided an upliftment in the gross margin which stood at 44.7% in FY20 (vs. 35.4% in pcp). ENPH continues to spend on R&D representing 7% of revenue in FY20. Its FY20 net profit was affected by $44.3 million one-off costs towards fair value changes of its convertible notes and warrants. The company acquired software tools provider during FY20 to accelerate homeowner’s buying experience and to increase mobile app engagement.

Figure 4. FY20 Key Financial Highlights:

Source: Company Reports

Cash flow from operations has been trending upwards and stood at $216.3 million in FY20. The company showed resilient performance with strong growth in operating income amidst COVID-19 and cash flows were supported by favourable working capital movements. ENPH reported free cash flows of $195.8 million in FY20. It had closed the fiscal year with a cash balance of $679.4 million as of December 2020 boosted by the issuance of convertible notes and the sale of warrants. Total debt surged to $330.9 million and the debt-to-equity ratio increased to 0.68x as of December 2020 as against 0.39x in pcp. Due to favourable capital structure with long-term notes, the company’s near-term obligations are adequately covered by existing liquidity.

Figure 5. Contractual Obligations:

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders together form ~43.72% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 10.06% and 9.03% respectively.  

Figure 6. Top 10 Shareholders

Key Metrics: ENPH showed strong revenue growth aided by product innovation, diversity in geography, and accelerated distribution strategy through tie-ups with solar module manufacturers and installers. The company’s gross profit benefited from lean and contract manufacturing model. Off late, the company is expanding its contract manufacturing facilities in emerging markets like India that helped to cut through dependency on China. The pandemic impacted cash collection from customers which resulted in stretched cash cycle days in FY20.  

Figure 7. Key Financial Metrics

Outlook: The launch of storage systems with eighth-generation microinverters is expected to increase an addressable market by four times by 2023. Residential storage is expected to add over $8,000 revenue per home (from $2,000 revenue currently). The acquisition of Momentum Solar in February 2021 is set to accelerate ‘all-in-one’ home energy solutions for residential homeowners. ENPH strengthened its partnership with Sunnova International Inc. to include storage systems which will benefit Enphase Energy for growth in customer additions. Recently, it had partnered with Urban Solar for the deployment of ENPH’s solar-plus-storage systems in the large-scale commercial solar systems in Florida. With these developments, ENPH is expecting Q1 FY21 revenue to be in the range of $280-$300 million and gross margin within 37%-40% with an assumption of nil tariff refunds. Guidance for operating expenses is in the range of $64.0-$67.0 million.

Key Risks: ENPH is exposed to counterparty credit risk with one customer accounted for ~29% of total revenue in FY20. The business patterns are seasonally based with softer customer demand usually in the first quarter. Changes in incentives for solar installation and a tax credit from the government may influence the demand. Reliant on a single manufacturer, Flex Ltd., for semiconductor-based microinverter may expose to supplier concentration risk and may lead to weak bargaining power. Any disruptions in supply-chain may delay the deployments and affects demand. ENPH is yet to expand its direct sales channel as it is highly dependent on solar installers and equipment distributors for reach. The imposition of tariffs by China forced ENPH to look for alternative supply arrangements. Tariffs for microinverters imported from China have been increased to 25% in May 2019 (from 10% earlier). Reducing solar panel and module costs put pressure on the company’s margins as the intense competition made solar manufactures and installers to look for cheaper sourcing to remain competitive. The adoption of distributed electricity trend may put pressure on utilities and may change the pricing structure which may invariably affect the demand.

Valuation Methodology: Enterprise Value to EBITDA Multiple Based Relative Valuation (Illustrative)

Enterprise Value to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: ENPH has delivered positive 3-month and 6-month returns of ~2.12% and ~99.62%, respectively. The stock is trading above the average of the 52-week high price of $229.04 and 52-week low price of $21.49. On the technical front, the stock has a support level of ~US$108.59 and a resistance level of ~US$207.28. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a slight premium as compared to its peer median EV/EBITDA (NTM Trading multiple) given the integrated product offerings and strong position in solar-plus-storage systems. Management is focused on expanding to new geographies such as Japan and to expand existing market share in Europe, Asia-Pacific, and Latin Americas regions. For this purpose, we have taken peers like Monolithic Power Systems Inc. (NASDAQ: MPWR), SunPower Corp. (NASDAQ: SPWR), SiTime Corp. (NASDAQ: SITM), to name a few. Considering the consistent profit generation, high ROE vis-à-vis industry, adequate liquidity and funding flexibility, we give a “Buy” recommendation on the stock at the current market price of US$132.06, down 8.0% on March 8, 2021.

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.