Enphase and SolarEdge are developing, marketing, and selling equipment into the residential solar market. Enphase reported results on April 25th, and SEDG reported results today (May 3rd). The companies sell inverters, battery storage, and other products for energy management. After earnings, ENPH stock was down about 25% while SEDG was up about 8% (after hours). The table below shows comparison of financial metrics for the past nine quarters.
While the companies have comparable revenue, ENPH is showing faster revenue growth, higher gross margins, and much higher FCF and FCF margins. In fact, over the past nine quarters, ENPH has generated a cumulative $1.2 billion in FCF while SEDG has produced negative $100 million in FCF. Operating expenses as a percentage of revenue is similar for both companies. Despite ENPH’s superior metrics across the board, its P/E is 30 while SEDG’s P/E is 37. I can’t imagine how anybody would own SEDG shares instead of ENPH shares (they must believe that the future for both companies is going to look a lot different than the past two years).
I fully agree that ENPH’s metrics are much more superior than SEDG’s and that’s why I am still holding a very large position in ENPH after Q1 ER.
In 2022, US revenue is only 36% of SEDG’s total revenue while it is 76% of ENPH’s total revenue.
That explains the AH difference post ER for SEDG 8% up vs ENPH 25% down (for the day) - SEDG is more of an international company (while ENPH is still a US dominant company), therefore their Q1 and Q2 guidance still beat the consensus easily due to international market’s outperformance and overall less impacted by the US headwind. That’s being said, I see this is a good thing for ENPH as their international business is just getting started and they have ton of growth ahead. Due to US weakness, just after 1Q, now international is 35% of ENPH revenue already (from 29% in Q4).
From SEDG Q1 2023 CC - "Solar revenues from the United States this quarter were $255.5 million, a 16% decrease from the last quarter and a 4% decrease from the same quarter last year, representing 28.1% of our solar revenues. Solar revenues from Europe were a record $577.1 million, a 22% increase from the last quarter and 102% increase from the same quarter last year, representing 63.5% of our solar revenues. "
Let’s look at what ENPH did in Q1 2023:
- US revenue 473m — -8.7% QoQ & 28% YoY (both are much better than SEDG even with a much larger revenue base)
- Europe revenue - 25% QoQ (ENPH didn’t break out Europe revenue from International), again better than SEDG but at a smaller base
Re US market, pretty much same message given by SEDG CEO: "In the U.S., the dynamic is more market related.
And as I mentioned in the remarks, we think that like it happens, by the way, in many markets where there is a significant change in regulation or in the financial atmosphere, it takes the market some time to adjust and to learn how to sell under this environment and how to install under this environment. So it’s true for them 3.0 in California, and it true for the rest of the market and the interest rate."
Some truths for ENPH IMO:
- They are in a very good competitive position and taking market shares
- Their US headwind is temporary - NEM3.0/high interest rate, once home owners see this “new normal” is here to stay, they would start to invest in solar again and H2 shall be better as per the management
- International market is still in hhhypergrowth mode (SEDG CEO even mentioned that currently their Europe demand > supply) and may last for many years as a megatrend
- Any future macro improvement/Fed rate cut will give ENPH a huge tailwind especially in the US market
Even without macro improvement, based on my own model, ENPH should grow 35-40% at the bottom with 30% FCF margin. Ya, 30 P/E does look like a fantastic deal.