Saul,
Thank you for your excellent write up about SEDG. You helped all of us to take good notice of this opportunity that Mr market offers, and only savvy investors like you and others in this board can recognise.
Yesterday I started a tiny position to keep an eye on it for further analysis, just because of you.
If it meets your criteria it’s good for me too to try.
Thanks again!
Maria
Gross margin of 27.6%
This gives me pause. That’s a low number. If there is competition and they are forced to lower prices then the company could swing into the red. Alternatively, if their volume sales are not sufficiently high then their gross margin may not be able to cover growing OpEx. Questions that I would have include…
are there components that could be redesigned so that they can lower their COGS?
having Tesla and SolarCity will help keep sales costs down because it requires a lower effort distribution channel. On the other hand, it leaves them open to customer concentration risk and purchasing power risk.
Chris
Gross margin of 27.6%. This gives me pause. That’s a low number.
Hi Chris, Companies with huge orders that they have to scramble to keep up with by increasing production and shipping by air, often have this problem. They seem to be resolving it as their manufacturing grows and they benefit from economies of scale. That 27.6 is up from 21.6 the quarter before. They had to do less air shipments, and probably pay less overtime and double shifts, but still were doing some air shipments that quarter.
Saul
I think they projected 26-28% for next quarter.
This is not without risk. The danger is that they will be become a commodity product as there is always a better technology over the horizon, but for right now, they are growing like mad.
Allow me to stick a contrarian nose in here for a moment.
I think they’re already a commodity product. Power inverters are all around us. Those ubiquitous wall-warts that plug into the wall are power inverters. Your computer has a power inverter inside it. Almost every electrical appliance you have has a power inverter. Even your gasoline powered car has a power inverter (or two or three).
Power inverters convert electricity between AC and DC. Electric grids around the world run on AC, as that form of electricity is much better for transmitting over long distances. But DC is generally more useful for electronic gadgets of all types.
Photovoltaic (PV) solar power - the typical solar panels - product DC power. That gets converted to AC to be compatible with our home’s wiring and our power grid. Then it often gets converted back to DC. Each conversion causes some loss of power - mainly through heating.
But there’s another issue that is specific to PV. If one panel produces less power than others on the same inverter, it will drag down the production of all of the panels. That can happen from dirt on the panels or shadows or a failing panel. So the efficiency of the PV system depends, to some extent, on the least efficient panel. You can overcome this somewhat by connecting fewer panels to an inverter. But that means using more inverters. There’s a cost/benefit tradeoff between the use of inverters and the efficiency of the system. Using more inverters increases efficiency, but the increase needs to be worth the cost of the additional inverters.
It looks to me like this company’s product is simply multiple small inverters packaged into a single box, with a bit of monitoring added to keep track of efficiency. That doesn’t strike me as groundbreaking, nor does it strike me as something subject to significant patent protection.
The problem I see with this stock is that none of this stuff is groundbreaking. What my gut is telling me is that this is a sales enterprise. They’ve got good sales people selling a decent, but not irreplaceable, product. Of course they’ve got good top line sales growth. That’s what start up sales companies look like. And the margins are, well, marginal - likely due to price cutting to get the sales. As soon as they try to increase prices to improve margins, the sales growth will crash.
Touting the sales to Elon Musk’s companies is just marketing blather. I suppose it at least validates their product is OK at the current selling price, otherwise Tesla and Solar City wouldn’t have bought at all. But even there, it looks like the main reason Solar City is buying from SolarEdge instead of Enphase is simply cost. SolarEdge’s inverters are cheaper. That’s pretty much the definition of a commodity.
So I think Saul has hit the nail, but didn’t realize it. The biggest risk to SolarEdge is that they will become a commodity product. But they are already a commodity product. Therefore, that risk has come to pass and the company is getting by for the time being by undercutting their significant competition. In the short term, that’s bad for Enphase. But in the longer term - which might not take all that long - it’s a problem for SolarEdge. Someone else can come along and take sales from them by accepting an even lower margin.
I’m going to take a pass on this one. It might be OK for another month or year or two. But when the time comes to hit the exits, there are going to be a lot of shareholders trying to squeeze through a few small doors. I don’t want to be around for that.
–Peter
Great post, Peter. The commoditisation explains the low gross margins.
Anirban
U.S. Global Investors’ Matousek notes that many solar energy stocks sank along with oil prices in 2014. Given that solar energy is an alternative to expensive fossil fuels, he says, it made sense for investors to anticipate that solar demand would slow as prices at the pump dropped and reduced near-term incentives to shop for lower energy alternatives.
When I see observations of this nature it makes me pause and marvel at how incredibly uninformed (or ill informed) the investor community truly is.
As oil prices plunge to something in the vicinity of $60/bbl solar stocks sympathetically sank on the logic that conventional fuel has become cheaper, thereby reducing the competitive pricing position of solar.
Of course, the flaw in this logic is the fact that the price of oil has no relationship to the cost of electricity. Virtually 0% of electrical capacity is generated from liquid fuels (discounting emergency backup generators which are typically fueled by diesel or gas). The predominant fuel employed by electrical utilities world wide is coal. But, apparently, in the minds of the majority of investors all fossil fuels are interchangeable, so if oil prices sink, somehow, magically so too must coal thereby reducing the primary input cost of generating electricity which in turn puts more price pressure on the solar industry.
Except for the little wrinkle that price of oil is unrelated to the cost of making electricity . . . but, oh well . . .
Power inverters are all around us. Those ubiquitous wall-warts that plug into the wall are power inverters. Your computer has a power inverter inside it. Almost every electrical appliance you have has a power inverter. Even your gasoline powered car has a power inverter (or two or three).
Peter,
Not to disagree, or agree, with your conclusion because I don’t have any research to support or dispute it but I view your basic statement that you derive your argument from as being false, or at least inaccurate. Those wall warts and other devices you mention are NOT power inverters. Power “inverter” is a device that specifically converts DC (direct current) to AC (alternating current). The devices you mention convert AC to DC, which is simpler. A solar unit creates DC power that must be converted to AC to power a house so that then much of it can be converted back to DC by those wall warts or internal converters for many of the modern devices we use. 
All pretty crazy, huh? As far as I know gasoline powered cars do not have any inverters, although you can buy inverters that plug into the DC outlets. So, they aren’t quite the commodity devices you might think although I’m sure there are a number of manufacturers of inverters. I believe the race in inverters for solar power systems is maximum efficiency since every watt lost is precious. I know nothing about this company and whether or not they have some edge.
Steve
There is some remote future correlation between oil and electricity prices.
Assume that oil goes to $10/bbl and stays there. There would be massive conversions of NG and coal plants to oil. And lower electric rates (but not much lower if your utility is anything like mine)
Of course in the real world the conversion wouldn’t be cheap and in fact nobody knows what oil prices will be next week much less over the next 20 years. Today’s oil prices have nothing to do with electricity prices.Except for special situations like Hawaii and some places in the Middle East.
I do think oil use has peaked in the developed world, and shale oil gives a huge underlying supply possibility. Probably there is shale oil elsewhere than in the US, it just hasn’t been tapped because of national politics or local incompetence. With their high overhead it is hard for Big Oil companies to exploit these but there are plenty of smaller companies that can. All of this suggests it will be a long time before we see over $100/bbl oil prices.
Those wall warts and other devices you mention are NOT power inverters. Power “inverter” is a device that specifically converts DC (direct current) to AC (alternating current). The devices you mention convert AC to DC, which is simpler.
Excellent point. I was speaking a bit too loosely there.
Power inverters take the straight line DC power and “invert” part of it to get wiggly AC output.
Rectifiers take that wiggly AC power and make it a [mostly] straight line DC current.
Rectifiers are all around us (there’s probably more than one around you right now), but inverters are less common.
However, the science of the electronics are well-known and have been for years. (Perhaps back to the debates between Edison and Tesla over whether AC or DC was better. Strangely, although many electric utilities bear his name today, Edison was on the DC side of the argument.)
But I think my error on this definition of inverters is not really relevant to my main argument. You can by utility grade inverters from at least the two companies mentioned in this thread. And there may be one or two others as well. From what I can determine, the main difference between SolarEdge and Enphase at the moment is that SolarEdge is cheaper. SolarEdge has had some big growth recently, but that is likely due to undercutting it’s competition on price. That is the first step toward commoditization of a product.
–Peter
Just for drill the assertion that Electric grids around the world run on AC, as that form of electricity is much better for transmitting over long distances is not true. It was a bit of marketing BS which George Westinghouse exploited in order to convince a bunch of capitalists that his system was superior to Thomas Edison’s.
In fact, Edison’s DC system is superior technology. There are numerous high voltage direct current (HVDC) transmission systems in place around the world. They have lower loss over long distances and do not suffer from phase relationship problems when combining power supplied to substations from different origins.
But, because George was successful in perpetrating this myth, we’re pretty much stuck with AC at the local level which creates the requirement for those ubiquitous wall-warts which you correctly observed are power inverters.
That’s a bit beside the point. It seems that the point is that the SolarEdge technology is not so simple as it may at first appear. If it were truly no more sophisticated than a package of smallish inverters I don’t think there would be winning market share. I don’t know how Mr. Rive makes decisions about what technology to employ. Maybe he defers all these questions to chairman and cousin Musk, who is an extremely well qualified engineer. Their revenue and earnings are both growing so they apparently have some pricing power.
Your probably right about the probability of crowded exits, but I think they’ve got a few years of growth before any alarms go off. I’m willing to take up a small position to see where it goes.
My understanding of the AC is much better for transmitting over long distances all related to the ability to change voltage of AC using transformers. Was there a suitable technology back then that allowed changing high voltage DC from a transmission line to a voltage more reasonable for household use? Or for that matter, a way to boost the voltage part way along a transmission line to compensate for the drop over the distance already spanned?
I feel like the crux of the issue is what competitive advantage, if any, SEDG has (and, if they have one currently, the chances of them holding onto it). I think that’s where a lot more research is needed.
This is a short article I found interesting pitching the idea that SolarCity should buy SolarEdge. The pitch aside, it provides a high-level summary of the players, their competitive positioning, and the specific synergies between SolarEdge and SolarCity. It also contains links to various industry research reports (by the same group), which could be interesting – I haven’t looked at those, and don’t even know if they’re available to the public.
http://www.greentechmedia.com/articles/read/5-Reasons-Why-So…
I’m interested in this company, but only if they have a competitive advantage of some kind. I need to understand their product and their market position better.
Neil
DC voltage drop may depend a lot on volts. While I know nothing about AC I did a lot of wiring on a 12 volt DC boat system and voltage drop even with good sized wires and short distances was pretty significant. Of course that was before the internet when it was hard to find appropriate wiring sizing and voltage drop information.
In any case it doesn’t matter what is best, the grid and homes are stuck with what they have.
For motors AC must have been a lot better for Musk and crew to put up with the loses converting from a DC battery to an AC motor.
Here’s a suggestion: Before anyone hits the “Buy” button to acquire SEDG shares, it would be good to consider the question: Why is SEDG valued 3x more than ENPH (Enphase)?
Whaaaat? Hey, I’m not looking to be obtuse. If you would care to read the entire post, you’ll understand the question.
Disclosure: ENPH shares now comprise 12% of my portfolio. If you read the entire post, you’ll understand why.
But first, let’s take a stroll down memory lane. From the dawn of the solar energy age, it was a pressing requirement to devise ways to convert the DC power generated by solar panels into usable AC current. String inverters were developed. They cabled all the panels together and fed the bundled line into an inverter module. String inverters dominated the industry. They weren’t problem free. If the inverter failed, the whole system failed. Furthermore, there was no way to know when/if a specific panel failed. Everyone wanted a better mousetrap. Then, less than a decade ago, folks devised better systems; namely microinverters.
Microinverters are modules installed on every panel to monitor performance AND invert the current to AC. The cabling ended as a single line feed with no intervening gizmos. Enphase (ENPH) became a leading pioneer. It clawed its way into the marketplace, displacing string inverters. It was a tough slog, but ENPH kept improving its systems until it had captured roughly 40% of the market (estimates vary).
SolarEdge (SEDG) had been doing business as a string inverter provider for a number of years (as a private company) prior to going public via an IPO this spring. SEDG entered the fray by offering a hybrid product: “DC-optimizers”. DC-optimizers function much the same as microinverters; that is, they allow individual panel monitoring just as microinverters do. They don’t invert the current, though (I suspect patent/IP restrictions are in play). Ergo, DC-optimizer systems still require bundling the cables for input into a separate DC inverter module. SEDG addressed a distinct competitive disadvantage, but still clung the inverter module which still constitutes a single point of failure.
Anyone wishing to get their geek on can visit both SEDG and ENPH websites. Both companies proclaim their products are the bestest. One can also find numerous articles comparing microinverters to SEDG’s DC-optimizers. My takeaway from such articles is that there’s no clear winner. Having said that, I’ll also say that ENPH has been going gangbusters globally, entering into all manner of agreements with suppliers, contractors and governments. ENPH went global years ago. SEDG has barely begun.
But let’s get back to the original question: Why is SEDG valued 3x more than ENPH? My answer? Either SEDG is wildly over-priced or ENPH is wildly under-priced.
Lets look at a few numbers: (note, I’ll offer numbers in pairs - the first number is from SEDG financials/the second from ENPH).
Market cap: 1.52 Billion/391 Million.
Total Revenue: 271M/373M
P/S (lower is better): 3.81/1.03
5-year Revenue Growth: 11%/41%
EBITDA: (-17M)/2.84M
Cash Flow: negative/positive
Actually, one has to work quite a bit to get a glimpse of SEDG’s financials. The company went public last quarter, hence, there’s not a whole lotta information regarding past history. I will note this: SEDG financials from its one public reporting period reflects a good bit of financial engineering. In the months leading up to its IPO, SEDG floated a large bond offering and then reaped millions from the IPO. As a consequence, SEDG reported 411% cash growth…but it didn’t come from sales. In fact, SEDG is cash flow negative and used cash flow from financing activities to offset losses from operations.
In contrast, ENPH exhibits Y-O-Y sales revenue growth of 50% Its 5-year growth average is 76.3% ENPH has no debt and positive free cash flow.
As matters stand, both companies enjoy consensus “Buy” ratings. ENPH sells today ~$9. Analyst 12-month estimates vary from $16 to $24. Even if ENPH were only to reach $16, that would be coming close to a doubling. Analyst 12-month estimates for SEDG are actually a bit lower than its current price. Upside potential? Dunno.
Here are summaries of current analyst estimates:
SEDG - http://tinyurl.com/nc3tutw
ENPH - http://tinyurl.com/q959373
Folks, I merely scratched the surface (yeah, I’m lazy that way). I suggest folks do detailed head-to-head comparisons of the two companies’ financials. By almost every significant metric, ENPH is outperforming SEDG.
It’ll take a few more quarterly reports before investors can have a solid understanding of SEDG’s performance. ENPH went public in 2009. Lots of data are available.
I remain quite bullish regarding the solar sector and ENPH in particular. Others may find SEDG more appealing. So be it. That’s what makes a market.
ENPH shares now comprise 12% of my portfolio.
putnid, SEDG aside, what is it that you like so much about ENPH to give it such a large allocation? It’s hard to imagine it grew to that organically, given the current share price.
Also, why doesn’t SolarCity like their stuff? That’s an honest question – I don’t know much about the industry.
Thanks!
Neil
what is it that you like so much about ENPH to give it such a large allocation? It’s hard to imagine it grew to that organically, given the current share price. - Neil
I’ve been investing in ENPH (as a swing trader) for over a year. ENPH has been very, very good to me. Without resorting to maths, I estimate I’ve enjoyed returns greater than 300%. I’ve posted about this several times before. In short, ENPH has traded within a range from ~$10 to ~$15. These 50% swings proved lucrative for me. The point to remember is that ENPH struggled to make a profit over the course of five years. If one studies the finanacial statements, one can see a steady progression towards profitability. ENPH is now on the cusp of significant profitability.
I hadn’t planned to allocate as much as I have to ENPH shares. But I’m the sort who tries to conceptualize a fair market price before I buy. Once I buy, should the share price continue to fall…I buy more. Frankly, I’m amazed the share price fell as fast and deep as it has. The Market has miscalculated ENPH’s value while gushing over “Musk Majik”. In the final analysis, the financials will win out.
As for SolarCity’s relationship with SEDG? I’ve no idea what went on between the three enterprises (Tesla, SolarCity and SEDG). Several analysts have opined that SEDG cut its price (SEDG’s profit margins are lower than ENPH’s). I really don’t know.
Frankly, I don’t consider SolarCity’s influence to be decisive (although the Market continues to revere all things Musk). SolarCity claims a 30-35% share of the US market. There are other players (e.g., Vivint) but, altogether, the US market for distributed solar is served by a whole slew of privately held enterprises. ENPH seems to be quite popular with a myriad of contractors. More important, ENPH has deep relationships with contractors in Europe, Australia and China. Should the estimates of global solar energy growth come anywhere close to expectations, ENPH can easily achieve a double-digit CAGR over the course of the next few years.
Hope that helped.
Great summary of ENPH, Putnid!
I’m an investor in them and also have 24 of their microinverters on my roof solar PV system.
I’ve had the system installed for almost 4 years now and loved the product and the many advantages it had over the old string inverters that were available when I was designing my system.
I don’t believe SolarEdge had their DC-optimizer product at the time I had my system installed.
One advantage I really liked about Enphase’s microinverters is they have a 25 year warranty (same as my panels) vs the 10-12 year warranty on string and DC-optimizer inverters.
Here is a link to my system stats online:
https://enlighten.enphaseenergy.com/pv/public_systems/9gX244…
I have a much more robust view of my system’s operation and reports I can run on my private access site, but Enphase lets you tag your site as public where it will show this minimal view to anyone that cares to look.
Mike
This is a short article I found interesting pitching the idea that SolarCity should buy SolarEdge. The pitch aside, it provides a high-level summary of the players, their competitive positioning, and the specific synergies between SolarEdge and SolarCity. It also contains links to various industry research reports (by the same group), which could be interesting – I haven’t looked at those, and don’t even know if they’re available to the public.
Hi Neil, I thought this was a very interesting article, for a number of reasons:
First, because of the date it was published. It was last October, when SolarEdge was a private company, before the IPO, before the big blowout December and March quarters, and before the deal with Tesla.
Second, because it was written by the solar analyst for GreenTech Media: MJ Shiao is the Director of Solar Research at GTM Research. When not occupied by the visions of PV balance-of-systems innovations dancing in his head, he leads GTM Research’s solar market analyst team and its coverage of the global solar PV value chain.
Third, because, as this was way before the IPO and it wasn’t yet a publicly traded company, he couldn’t have been touting SolarEdge because he had a long position in it. He must have seen a real advantage for SCTY in acquiring SolarEdge.
Thanks for posting it.
Saul
f course, the flaw in this logic is the fact that the price of oil has no relationship to the cost of electricity. Virtually 0% of electrical capacity is generated from liquid fuels (discounting emergency backup generators which are typically fueled by diesel or gas). The predominant fuel employed by electrical utilities world wide is coal. But, apparently, in the minds of the majority of investors all fossil fuels are interchangeable, so if oil prices sink, somehow, magically so too must coal thereby reducing the primary input cost of generating electricity which in turn puts more price pressure on the solar industry.
Well sorta, plenty of electricity around the world is produced using ng and unlike in the US, much of the world’s ng prices have traditionally been pegged to the price of oil.
As for the price of coal, if you don’t think lower ng prices hasn’t caused the price of coal to go down you haven’t been paying attention.
When it comes to different sources of energy and their respective prices they are all related, certainly their traditional price relationships can and have been upended at various times, but as long as there is an arbitrage opportunity, absent government interference, it is only a matter of time before the market will close it. (When and how is an entirely different question.)
B