Enphase, a new full position

[SaulR80683]

My Take : Enphase is a great company. It’s a company with $2.33 billion (!!!) in revenue that is still growing revenue at 79% and 69% the last two years, and even accelerating in recent quarters with yoy growth the last 5 quarters of 56%, 46%, 68%, 81%, and 76% in the most recent quarter. Sequential Growth was 17%, 7%, 20%, 20%, and 14% in the most recent quarter.

Now listen to this: At this scale ($2.3 billion), adj operating income for 2022 was $690 million !!! which was up 102% from the year before. Would you say that they are being slowed down by the macro situation? Free cash flow was $710 million! EPS was $4.62 per share.

Gross margin is lower than most of our companies but has been growing too: 40.2%, 41.0%, 42.2%. 42.9%, 43.8%, in the last five quarters.

So what do they do? They provide the easiest to install, and apparently the best, microinverters and batteries for home and SMB solar panels, and for storing the electricity that they produce, and are moving towards producing an entire integrated energy system. They work through a constantly increasing system of independent installer partners. As you understand by now, I don’t understand the tech at all, just the success of the company. Those were some pretty impressive numbers.

They are now expanding world-wide very successfully, especially in the EU, after starting in the US.

Talking about an efficient business! With $2.33 billion in revenue and a gross margin for the year of 42.6%, that means they had only $993 million to work with! And they turned $690 million of it into operating income!!! Wow! Their operating expenses were only 12% of total revenue!

Their Net Promoter Score was 71% worldwide and 74% in North America. Awesome!

“Our U.S. and international revenue mix for Q4 was 71% and 29% respectively. In the U.S., our revenue increased 15% sequentially and 59% year-on-year… In Europe, our revenue increased 21% sequentially and more than 130% year-on-year, led by strong demand in Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. We had record sell-through and record installer count in Q4 as we continue to grow our business. We started shipping our IQ8 microinverters into Netherlands and France in Q4. We are working hard to introduce IQ8 into other European countries shortly. Also, we are currently shipping IQ batteries into Germany and Belgium. We expect to start shipping IQ batteries into Austria, France, Netherlands and Spain in the first half of this year.”

Enough, I have taken a full position. Thanks to the people who brought it to the board. I wish that I had listened sooner.

Saul

[qazulight]

Saul,

Not me. I reviewed it and not only did I see q over q slowing, projected growth q over q was projected to essentially zero. With interest rates rising and most installations requiring batteries to be economically beneficial, Enphase has projected a flat first quarter.

Worse anyone buying solar plus storage now knows that batteries are rapidly depreciating asset; this is due to rapid advances in chemistry and manufacturing prowess.

I like Enphase and believe that they have a bright future, but I do believe that they will have a very disappointing first quarter. At least as it pertains to revenue growth.

I am curious what changed your mind and got you to take a full position in a company that projected flat q over q revenue growth this quarter.

Cheers
Qazulight

[captainccs]

@SaulR80683

Enough, I have taken a full position. Thanks to the people who brought it to the board. I wish that I had listened sooner.

Actually your timing is pretty good! ENPH is 43% below its all time high Three year chart!

Over several decades I have seen several electrical equipment companies take off like a rocket only to return to earth. All I mean by that is that this is a stock that bears watching, it’s not buy and forget.

The secret sauce is the micro inverter, an inverter on every panel, as opposed to line inverters where the panels are all wired together into a line and there is one large ‘line inverter’ to handle them all. Line inverters are cheaper but have a huge downside, the low production panels hinder the whole line. Cast a shadow on one panel and all panels are degraded. The higher price of the micro inverters is more than offset by the extra efficiency.

The rest of the businesses Enphase is dealing in (storage, etc) are much more commoditized which should reduce gross margins as they grow.

Denny Schlesinger
very long ENPH

[MAS4R]

Well, I also initially placed ENPH on my short list because given the tenor of the call, Q1 may not be great in terms of US revenue specifically. However, that’s precisely the point: what follows at that call, which should be up from there in terms of company performance, not down.

Also, I disagree with the rates impact, the rates are what they are. A tad more or a tad less than now won’t matter. For big movements, a lot less than now is much more likely than a lot more than now and this would only raise the floor for all our companies, including ENPH.

My position is small and I am not as confident in ENPH as in others, but that’s more because of my ignorance of the segment and of the details of the business rather than because of Q1 expectations. I also don’t think that SaaS QoQ metrics matter much here.

[BeachMan2115]

@SaulR80683 I am curious whether this ENPH purchase signals a change in your investing methodology. It seems quite different from the other companies you hold.

I like to study investing methods and processes. Hence the genuine question.

Some of the differences right off the bat:

1. It manufactures a physical product
2. It is not a SaaS company nor a cloud company
3. It has lower gross margins, which might stay in the 40s given that it manufactures stuff
4. It has slowing forward growth rates…see table below. (Source: Finnhub). Growth is expected to slow for the next 5 quarters, mostly due to high comps, with a possible recovery in mid 2024.

Don’t get me wrong. This is an excellent company by many measures, some of which you mentioned above. It scores very high on my watchlist too.

In addition to understanding why you chose this company, I am also curious what you sold or trimmed in order to buy ENPH.

Maybe you plan to elaborate in your monthly report this coming weekend.

Thanks
Beachman

P.S. if I have asked anything off-topic or contrary to this board’s principles, please ignore my dribbles.

[intjudo]

If (like me) you think “sustained elevated inflation” is likely regardless of interest rates, then it’s reasonable to conclude that macro conditions make solar a compelling inflation-fighter.

A solar installation not only converts sunlight to energy, it converts a variable-and-rising cost to something approximating a fixed cost.

[SaulR80683]

Hi Beachman, I thought I explained very well why I was investing in Enphase. You are correct though that it sells a physical product, it’s not a SaaS company, it has gross margins in the 40’s (but so what? they are enormously profitable anyway!), but if you think an organization like Finnhubb can predict revenue 8 quarters ahead , I don’t know what kind of weed you’ve been smoking. We have trouble with one quarter, and two ahead is totally impossible.
Saul

[XMFRob]

The flat upcoming quarter is completely expected per the 4Q conference call, but perhaps we’ll see a bit of growth since they typically overperform.

The best part of the bear position is that Enphase provides a “commodity product”, but that is incorrect. Not commodity… but accomplishing solar management with a custom product line… with ongoing enhancements… a strong relationship with the installer customer base… while achieving solid margins in a rapidly growing revenue/TAM environment. Keep in mind that some of the most successful companies operate in the commodity environment… by doing it exceptionally (AMZN, NFLX, TSLA for example).

Here’s the February investor’s deck: https://investor.enphase.com/static-files/7a95029a-a55b-4f1a-8fe1-5b3c41fef946?v=feb-2023

The balance of the year should be impressive as a major production expansion is coming online and the results will drive the balance of 2023 (and tbd beyond). I expect a bit over $6 EPS this year with that 50%+ growth (being conservative)… keeping in mind that makes the forward PE ~35. I translate that as “good deal”.

I’m about 55%/45% January 2025 call options and the balance shares. I plan to add some to my position, which is now 12% of the portfolio.

Disclosure: Portfolio allocations: TSLA ~50%, SMCI ~18%, TMDX~12%, ENPH~12%. In my case, I think SMCI has more upside but I’m fine with more ENPH because they should do well too.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

[SaulR80683]

Yes, I wonder how anyone can believe they make a commodity product. Does any company selling a commodity product grow adj net income 80% one year and 90% the next, the way Enphase just did? It’s a laughable suggestion.

And talking about tough comparisons, they did grow it 80% in 2021, so they should have hardly grown at all in 2022, right? But they grew it 90% in 2022 !

Saul

[BeachMan2115]

@SaulR80683 Thanks for confirming that you are tweaking your process or criteria for the companies you own. I made a note.

Finnhub is an aggregator of financial data for over 65,000 companies. Their data is used by stock exchanges, trading houses and investors all over the world. For ENPH, they are synthesizing forward growth estimates from the 42 analysts that cover the stock. Analysts that do channel checks, supply chain and order pipeline analysis, discounted cash flow analysis in addition to earnings calls and mgmt meetings…to calculate their growth estimates. Better estimates, imo, than just what the mgmt tells us in their quarterly report.

Coming back to ENPH…

Microinverter a commodity?
While one might assume that the microinverter will become a commodity some day, ENPH’s secret sauce is the custom ASIC chip that is in their IQ8 and soon to be launched IQ9 microinverter. This chip has multiple smarts built in to monitor and optimize the current production, usage and storage, monitor and adjusts to grid events and connectivity etc. The IQ8 right now comprises of about 47% of their product shipments. And they expect this number to go up to as high as 90% by Q2 this year.

Market opportunity
They have shipped more than 52 million microinverters as of today. They have installed more than 2.7 million clean energy systems in more than 145 countries. They have shipped and installed almost 700 megawatt hours of energy storage systems as part of these installations. And Enphase has over 350 patents in place today globally. By the year 2025, they estimate that they have a market opportunity of about $23 billion.

And the recent IRA law passed in the US is going to be a very strong tailwind for at least the next 2-3 years. So Europe demand could slow down and the US demand could pick up.

Anyways, I am going back to smoking weed and drinking scotch on the beach…

[XMFRob]

@SaulR80683

Yes, I wonder how anyone can believe they make a commodity product. Does any company selling a commodity product grow adj net income 80% one year and 90% the next, the way Enphase just did? It’s a laughable suggestion.

And talking about tough comparisons, they did grow it 80% in 2021, so they should have hardly grown at all in 2022, right? But they grew it 90% in 2022 !

I may not understand the details of how/what/why they have a competitive advantage technically (this… and other companies)… but sustained rapid growth in revenue and profits is always a strong argument in my mind.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

[DSNerd]

@BeachMan2115

And the recent IRA law passed in the US is going to be a very strong tailwind for at least the next 2-3 years. So Europe demand could slow down and the US demand could pick up.

I was waiting for someone to mention the IRA as I was scrolling through the thread. I forget the exact amount but I believe Badri said they’d save $20-30 “per unit” for the US lines they’re building, even when accounting for higher labor costs, etc.

When I’ve googled the cost of a microinverter online it was typically $150-250. Assuming he meant a microinverter as “a unit”, the IRA could produce a meaningful bump to gross margin (not to mention tax credit continuation for both solar + battery).

If anyone has corrections or clarification on what he meant exactly, let me know.

EDIT Below for more details:

I went back and looked through the earnings call transcript and here’s the relevant quotes:

Mark Strouse – JPMorgan Chase and Company – Analyst

Got it. OK. And then maybe, Badri give you a little bit of a break. Mandy, can I ask – I mean, we’re all doing the math on the domestic manufacturing tax credits.

But I mean is there any color that you can share yet as far as kind of the upside from the tax credit, the potential downside from higher input costs, just kind of the blended average, the appropriate way to be thinking about that U.S. manufacturing from here?

Badri Kothandaraman – President and Chief Executive Officer

Yeah. I mean, net-net, we expect a net benefit of between $20 and $30 a unit. I’m giving you a wide range right now because we do have some puts and takes, and we will refine it as we go.

Steven Fleishman – Wolfe Research – Analyst

OK. No, that’s – so ultimately, expect, obviously, significant volume growth from that. And then on margins, you mentioned I mean you’ve had the gross margin held up well. But then the $20 to $30 that you just mentioned, is that a gross margin benefit net of cost?

Badri Kothandaraman – President and Chief Executive Officer

The IRA gives you an incentive, which is $0.11 a unit, $0.11 per AC watt. Now, every microinverter that we make, let’s say, the microinverter that we make 320 AC watts. 320 AC watts multiplied by $11, right? So that number is roughly about $35. So that $35 is the net benefit.

Now it takes us some incremental cost to manufacture in the U.S. versus manufacturing in Mexico, called that as some delta, right? It also takes us – we want to make sure our contract manufacturing partners are healthy as well. So therefore, they share a little bit of that incentive. Therefore, the net benefit for us would be that $35 minus the incremental cost added, minus the benefit we pass on to our contract manufacturing partners, and that number is what I reported as to $20 to $30 net benefit per unit.

That’s all incremental to what we have today.

For some back of the envelope math–Enphase delivered $724m in revenue and 4.9m microinverters last quarter. Assuming all of that revenue came from microinverters (ignoring batteries for example), we’d get a per unit sales price of $148 per microinverter. At 43% gross margin, that means each microinverter costs $83 to manufacture currently.

A $20-30 reduction in cost per microinverter through the IRA would bring each unit to around $50-60. Badri also mentioned earlier in the call that they use a “value-based” pricing approach rather than cost-plus, meaning they won’t necessarily pass this savings on to the customer unless it makes sense to do so based on their demand curve. As a result, let’s assume a $140 microinverter price with $60 COGS = 57% gross margin!

This is all just rough math and he mentioned it will take 4-6 quarters to ramp these US manufacturing lines, but it could definitely be a major margin tail-wind a year or two from now.

[MFChips]

I’ve been in the ASIC design business since I started at Honeywell in 1987… The ASIC design process takes several years (and several Million dollars) from idea to shipping in your product. These are likely mixed signal complex designs, so for now, Enphase has a strong moat. But my caution would be with Tesla’s ambition to vertically integrate. Tesla has an incredibly talented chip-design department in their own right. I have been out of ENPH for a couple years, awaiting the announcement of Tesla’s competitive product, which will certainly put margin pressures on Enphase. Tesla is all in on vertical integration, and their chip-design talent is world class. I have no inside knowledge here, but if an ASIC is their moat, I’d be careful…

[nilvest]

One thing really stands out for Enphase is their strong focus on installer network.
IMO - this is THE moat… its not ASIC - the ASIC they have is one of the lowest end… its not inverter, SEDG has fairly good, competitive inverter… Tesla has stepped up as well…
Its installer network who they have nurtured, trained, provided software tools to make their life easier… and those installers can buy from / sell anyone else’ product in theory but they remain very Enphase focus because Enphase enable them to do more business in easier way.

Having said all of these, and IRA effect, I do worry ENPH is really up against tough comps this year and if market behaves the way it does for our SaaS companies showing deceleration in growth, I would have nightmares owning ENPH today. I rather add little by little to Datadog and MDB and SNOW etc. whose comp will get easier and easier over next few quarters and have fairly sustained growth rate than watch something non-SaaS go through strong deceleration… and certainly at current valuation it is absolutely No Go for me.

[MFChips]

Yeah, I agree with that. My BIL just got a system in Kauai with Enphase microinverters and I got to talk to the installer a few weeks later when they came back to do some software upgrades, etc. I’m a EE with a passion for clean energy, so I had lots of questions.

The installers like the system for a variety of reasons, but in the end, it will come down to where they can make money. Their loyalty will vanish in microseconds.

The hardware (panels, inverters, etc) gap will always be closed and commoditized. It just will. I’ve lost a fortune in Semiconductor & networking stocks dating back to when I ran the semiconductor board on AOL for MF.

Saul is having doubts I think in his methods.
And I think SaaS is now mostly universally appreciated so undervaluation compared to long term growth is no longer as obvious there.
And growth, growth growth is pretty much useless. Which is why everyone’s portfolio has flipped so much on this board.

I’m personally still under the belief that DDOG, SNOW and NET will grow durably for many years and will far exceed any stock such as Enphase who has no recurring revenue.

I don’t believe the fastest growing SaaS stocks will win necessarily, but if they can grab market, and transition to cash generation at some point, while building a moat that makes them difficult to displace?

[DSNerd]

@nilvest

One thing really stands out for Enphase is their strong focus on installer network.
IMO - this is THE moat… its not ASIC - the ASIC they have is one of the lowest end… its not inverter, SEDG has fairly good, competitive inverter… Tesla has stepped up as well…
Its installer network who they have nurtured, trained, provided software tools to make their life easier… and those installers can buy from / sell anyone else’ product in theory but they remain very Enphase focus because Enphase enable them to do more business in easier way.

I was just writing a very similar response. On the earnings call, Badri frequently discusses the software, training, and tools they provide to the installers in order to make their lives easier and more efficient. There’s been quite a few comments in the past 2 calls about significantly reducing the battery installation time in order to make it more profitable for installers (and hopefully more affordable for customers). He also talked about updating their Solargraf software to allow better modeling / proposals for California customers that incorporate NEM 3.0 guidelines to optimize solar + battery storage utilization.

My experience is obviously only an N=1, but when purchasing my solar I didn’t know much about the various systems and simply went with what my installer recommended. And he was very clear that the ENPH system was top notch in terms of quality and service–acting almost as a de facto salesperson for ENPH.

Having said all of these, and IRA effect, I do worry ENPH is really up against tough comps this year and if market behaves the way it does for our SaaS companies showing deceleration in growth, I would have nightmares owning ENPH today. I rather add little by little to Datadog and MDB and SNOW etc. whose comp will get easier and easier over next few quarters and have fairly sustained growth rate than watch something non-SaaS go through strong deceleration… and certainly at current valuation it is absolutely No Go for me.

I don’t want to get too much into valuation discussions, but I just wanted to point out a few metrics for each:

• DDOG trades at 65x LTM FCF with 26% consensus NTM revenue growth (28% in t+2)
• SNOW trades at 90x LTM FCF with 40% consensus NTM revenue growth (38% in t+2)
• ENPH trades at 40x LTM FCF with 36% consensus NTM revenue growth (28% in t+2)

I should note that I own all 3 and DDOG / SNOW may see re-acceleration later in the year (and ENPH estimates may be way off), but I don’t see the valuation argument against ENPH, especially when you start factoring in SBC, GAAP profitability, and IRA tailwinds.

[captainccs]

@MFChips

The hardware (panels, inverters, etc) gap will always be closed and commoditized.

I mentioned this in an earlier post. This is what I would be checking for while long the stock.

Denny Schlesinger

[ZoroSGInvesting]

@nilvest

I rather add little by little to Datadog and MDB and SNOW etc. whose comp will get easier and easier over next few quarters and have fairly sustained growth rate than watch something non-SaaS go through strong deceleration

The heavy deceleration in SaaS stocks has NOTHING to do with YoY comp, it is the QoQ deceleration that matters. If this bad macro is to continue in the next 4-6 quarters, even they will have easier YoY comp in CY24, their QoQ growth would still stay low (and might be lower than same quarter last year) for each quarter whereby YoY growth will continue to decelerate.

One thing many may overlook about ENPH is that - not only they are growing much faster than all SaaS stocks right now with SUPERIOR profitability (as Saul mentioned), they have the rare combination of both short term and long term tailwinds:

1. Short term. Many were speculating a strong deceleration in 2023, I highly doubt it. They have been fully booked in Q1 (their distributors/installers normally pre-ordered for at least 6 months stocks although some US installers ordered a bit less recently due to macro concerns but ENPH said that their end customer activations/originations remained strong in Jan), and management also said they were cautiously optimistic about Q2 in the US. And their Europe business is still under explosive growth mode. IMO, they would deliver 3.8B+ revenue this year, at least 60%+ YoY growth - compare to what happened to SaaS stocks last year, their deceleration this year would be minimum.
2. Mid & Long term. Management highlighted a few long term tailwinds for ENPH in Q4 CC:
   “first, the utility rates which are rising in many states across the U.S.; second, the 30% ITC tax credit, which has been extended for 10 years with the IRA; and third, the desire for energy independence and tackling climate change.”
   In my opinion, the mass adoption of EV in the next few years (especially after Tesla’s 25K “Model 2”) will significantly boost home solar installations especially ENPH.

Solar is a mega trend and IMO ENPH might be the best bet to ride on this trend and they could maintain 40-50%+ growth for many years to come.

For those who are concerned about whether ENPH’s products are commodity, please go read Q4 CC one more time and you will discover their management’s insane execution, deep understanding on the industry and why their solutions stand out. Also highly recommend the following video presented by ENPH Founder & CPO Raghu Belur in 2021:

Enphase Founder Raghu Belur at the Powur Scale Up National Convention 2021

Zoro
Long ENPH with 16.6% position

[nilvest]

Just to follow up to some of the responses.

1. ENPH certainly have one of the best quality management, execution and ofcourse products in this industry. Without that, no one can deliver these results.
   But many companies do have these things…
   what differentiates ENPH is the installer network, their consistent focus on it… it is very unique in this industry.

I have started recognizing this a major force for a successful high growth company… it is akin to developer focus by Datadog and Twilio or MDB… focusing on who actually is influencing decision (installer) and not just the final buyer (consumer).
Medtech has similar characteristic

2. Agreed with the tailwinds… but there are also significant headwinds this year that were not so last year… specifically
   a) I believe it is Germany whose incentives expire soon (if not already)…
   b) Europe’s fear and frenzy over energy… yes, people will continue to install solar this year… but I am not sure that fear about energy will be same this year… So the growth over last year is question in my mind…
   c) California NEM 2 to NEM3 transition… in some ways, this can be a drag in demand… but eventually this will be good because powerwall becomes more valuable and therefore, may be fewer installation but more $ value…

4. interest rate… certainly lot higher this year than last year…

Again - this is a great company, great execution… will continue to grow… its the potential for deceleration that I am afraid of…

and ENPH is not trading at any kind of discount to its potential today to leave some room for error…

And for those who think it will not decelerate, you may be right, I wish you best.

[HermioneW]

Saul,
A while ago, you got into ENPH for a try-out position and then sold out in the subsequent month. Later on, in one of the posts, you questioned how the NEM 3.0 would impact their business. Has that concern being answered and doubts dissolved?

Under the current NEM 2.0, homeowners get $0.30 per KWH for the excess power they push out to the grid. Under the new NEM 3.0, just $0.08 per KWH. The main reason is that the timing of homeowner exporting the excess power (during the daytime) does not match up well with the highest power usage time (usually 7-8 pm). So there is big push to optimize the utilization by installing solar panel and a battery storage. That way, homeowners could regulate the power push out from storage to the grid in the most efficient way (incentivized by higher export rate during peak time). Still, that’s an average of 75% reduction of credit to homeowners. Second, CA generates 20% of business for ENPH. To say it will not have much impact is bit baffling.

Ok, so will battery generate more business for ENPH? According to ENPH, inverter costs about $2,000 while battery $7,000. They tout NEM3.0 gives them an opportunity to sell a suite of products instead of just inverters. Here is what they said in Feb earnings call

· NEM 3.0 is no issue. We have the 3rd gen batteries and software engine for optimization

· We expect our battery business to perform well in the second half of the year, both due to our third generation battery as well as NEM 3.0 adoption in California.

· On NEM 3.0, we are not seeing pull forward buy

· Re NEM 3.0, So bottom line, we are incredibly optimistic. We got the right batteries for it with the third-generation battery

· We got the modularity, which I think will start becoming popular. Grid tied may become popular, but we will be ready to do either grid tied or off grid, on grid with backup. The things that are looking, we like NEM 3.0. Of course, we didn’t like the fact the step down happened right away. But I think in the long-term, it’s an okay

And this is what Solar Edge said in their Feb earnings call

· with our DC coupled batteries, we believe that after a transition period following NEM 3.0 coming to effect, we will see a gradual market recovery and good adoption of solar PV+battery

· And I think the recovery will be a function of stabilizing the demand once the – everyone understands the implications of NEM 3.0 and get set up for them properly in terms of offering and installation capability, etc., and the general stabilization of the environment. So, I don’t think we have a very different outlook than those that you can see and those that you are providing from other from other areas in terms of when things will begin to pick up at a higher rate. But with the predictability of the ITC post IRA and the attractiveness for solar installations, we’re confident that it will recover and come back to nice growth.

Some organizations indicate that with the purchase of battery storage, the payback time could be doubled. Others say if homeowners time the export time right, it could be an equal payback time for solar/battery vs. solar only.

I think the impact will be brought upon, but I just don’t know how the adoption will go, whether and how fast the battery to solar panel attachment rate will go up and how long the recovery period will be.

Lastly, Europe is sure a boon for solar companies as Europe is working to get energy independent from Russia as fast as they can. And the attachment is high (70% in Germany vs. 17% avg in US). However, is there a pull forward of demand? Will growth drop off after the initial rush?

I intend to stay nimble for the next couple of earnings and will reevaluate after things become less nebulous.

Would love to hear your thoughts. Thanks Saul and the other board members.