enphase investor day presentation

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Enphase Energy, Inc.

Us29355a1079, renewable energy equipment & services.

• Enphase Energy : Investor Day 2021 Presentation

Transformation

Solar to Energy

INVESTOR DAY

NOVEMBER 16, 2021

Safe Harbor

Use of Forward-Looking Statements

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements concerning our anticipated financial performance and guidance, including revenues, gross margin, operating results, expenses and costs; our business strategies, including results of investments and acquisitions, and the expected size, trends and developments in markets in which we target and operate and in those to which we plan to expand; the anticipated capabilities, performance, and market adoption of Enphase's new technologies, products and product features; the expected capacity of components and the availability of our products; our planned sustainability efforts; our performance in operations, including in logistics, product quality, cost management, and by our suppliers; our anticipated performance in customer service and that by installers of our products; and our expectations as to the impact and evolving effects of the ongoing COVID-19 pandemic. Any statements that are not of historical fact, may be forward-looking statements. Words used such as "anticipates," "believes," "continues," "designed," "estimates," "expects," "goal," "intends," "likely," "may," "ongoing," "plans," "projects," "pursuing," "seeks," "should," "will," "would" and

similar expressions are intended to identify forward-looking statements, although not all forward- looking statements contain these words. All forward-looking statements are based on our current assumptions, expectations and beliefs, and involve substantial risks and uncertainties that may cause results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on our forward-looking statements. A detailed discussion of risk factors that affect our business is included in the filings that we make with the Securities and Exchange Commission (SEC) from time to time, including our most recent reports on Form 10-K and Form 10-Q, particularly under the heading "Risk Factors." Copies of these filings are available on the Enphase website at https://investor.enphase.com/sec-filings or on the SEC website at www.sec.gov. All forward- looking statements in this presentation are based on information currently available to us, and we assume no obligation to update these forward-looking statements in light of new information or future events.

Industry Information

Information regarding market and industry statistics in this presentation is based on information available to us that we believe is accurate. It is generally based on publications that are not produced for purposes of economic analysis.

Non-GAAP Financial Metrics

• The Company has presented certain non-GAAP financial measures in this presentation. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can be found in the Appendix to this presentation. Non-GAAP financial measures presented by the Company include non-GAAP gross margin, operating income (loss), adjusted EBITDA, and free cash flow.
• These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. Enphase believes that these non- GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.
• As presented in the "GAAP to non-GAAP Reconciliation" page, each of the non-GAAP financial measures excludes one or more of the following items for purposes of calculating non-GAAP financial measures to facilitate an evaluation of the Company's current operating performance and a comparison to its past operating performance:
• Stock-based compensation expense. The Company excludes stock-based compensation expense from its non-GAAP measures primarily because they are non-cash in nature. Moreover, the impact of this expense is significantly affected by the Company's stock price at the time of an award over which management has limited to no control.
• Tariff refunds. This item represents approved tariff refunds, and interest income earned on those refunds, by the U.S. Customs and Border Protection that qualify for the tariff exclusion on Chinese imported microinverter products that fit the dimensions and weight limits within a Section 301 Tariff exclusion under U.S. note 20(ss)(40) to subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States. Approved refunds relate to tariffs previously paid from September 24, 2018 to March 31, 2020 and are excluded from the non-GAAP measures as the refunds are non-recurring in nature for tariff costs incurred in the past and are not reflective of the Company's ongoing financial performance.
• Restructuring and asset impairment charges. The Company excludes restructuring charges due to the nature of the expenses being unplanned and arising outside the ordinary course of continuing operations. These costs primarily consist of fees paid for restructuring-related management consulting services, cash-based severance costs related to workforce reduction actions, asset write-downs of property and equipment and lease loss reserves, and other contract termination costsresulting fromrestructuring initiatives.
• Acquisition related expenses and amortization. This item represents expenses incurred related to the Company's business acquisition, which are non-recurring in nature, and amortization of acquired intangible assets, which is a non-cash expense. Acquisition related expenses and amortization of acquired intangible assets are not reflective of the Company's ongoing financial performance.
• Reserve for non-recurring legal matter. This item represents a charge taken for the potential settlement cost related to a dispute with a vendor. This item is excluded as it relates to a specific matter and is not reflective of the Company's ongoing financial performance.
• Non-recurring debt prepayment fees and non-cash interest expense. This item consists primarily of amortization of debt issuance costs, accretion of debt discount and non-recurring debt settlement costs, because these expenses do not represent a cash outflow for the Company except in the period the financing was secured or when the financing was settled, and such amortization expense or settlement of debt costs is not reflective of the Company's ongoing financial performance.
• Loss on partial settlement of convertible notes. This item is reflected in other income (expense), net and represents (i) the difference between the carrying value and the fair value of the settled convertible notes and (ii) the inducement loss for the difference between the value of the shares issued to settle the convertible notes and the value of the shares that would have been issued under the original conversion terms with respect to the repurchased Notes due 2025, which is non-cash in nature and is not reflective of the Company's ongoing financial performance.
• Change in fair value of derivatives. This item is reflected in other income (expense), net and represents changes in fair value of the conversion option in the convertible notes due 2025, as well as the convertible note hedge and warrant transactions, which is non-cash in nature and is not reflective of the Company's ongoing financial performance.
• Non-GAAP income tax adjustment. This item represents the amount adjusted to the Company's GAAP tax provision or benefit to present the non-GAAP tax amount based on cash tax expense and reserves.
• Adjusted EBITDA. When calculating Adjusted EBITDA, in addition to adjustments described above, the Company excludes the impact of cash interest expense, net of interest income, income tax provision (benefit) and depreciation and amortization.
• Free cash flow. This item represents net cash flows from operating activities plus deemed repayment of convertible notes attributable to accreted debt discount reported in operating activities and payments for acquisition reported in operating activities less purchases of property and equipment.

Kothandaraman

Chief Executive Officer

This is an excerpt of the original content. To continue reading it, access the original document here .

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Enphase Energy Inc. published this content on 16 November 2021 and is solely responsible for the information contained therein. Distributed by Public , unedited and unaltered, on 16 November 2021 20:06:10 UTC .

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Enphase energy to host investor day on november 16, 2021.

FREMONT, Calif., Nov. 09, 2021 (GLOBE NEWSWIRE) -- Enphase Energy, Inc. (NASDAQ: ENPH), a global energy technology company and the world's leading supplier of microinverter-based solar and battery systems, today announced that it will host its Investor Day in San Francisco, CA on November 16, 2021 at 9:00 a.m. PST.

In-person attendance is by invitation only as space for the event is limited. The presentation will be a live virtual webcast found in the Events & Presentations section of Enphase Energy's investor relations website at investor.enphase.com . A replay of the presentation will also be available in the Investor Relations section of the company’s website within 24 hours after the event concludes.

About Enphase Energy, Inc.

Enphase Energy, a global energy technology company based in Fremont, CA, is the world's leading supplier of microinverter-based solar and battery systems that enable people to harness the sun to make, use, save, and sell their own power—and control it all with a smart mobile app. The company revolutionized the solar industry with its microinverter-based technology and builds all-in-one solar, battery, and software solutions. Enphase has shipped more than 39 million microinverters, and over 1.7 million Enphase-based systems have been deployed in more than 130 countries. For more information, visit https://www.enphase.com and follow the company on Facebook , LinkedIn and Twitter .

© 2021 Enphase Energy, Inc. All rights reserved. Enphase, the "e" logo, and certain other names and marks are registered trademarks of Enphase Energy, Inc. Other names are for informational purposes and may be trademarks of their respective owners.

Karen Sagot Enphase Energy, Inc. Investor Relations [email protected]

Enphase Energy Inc Investor Day Transcript

Nov 16, 2021 / 05:00PM GMT Karen Sagot - Welcome to the 2021 Enphase Investor Day. I'm Karen Sagot. I'm the Head of Investor Relations here at Enphase, and we are thrilled to be here in person with all of you that were able to make the trip to San Francisco and appreciate all of those on webcast taking the time to be with us, too. Before we get started, please if you don't mind silencing your phones and laptops, we would really appreciate it. The other thing I need to tell you is the presentation that you're going to see here will be posted to our website at the conclusion of today's formal presentation. I must mention that statements made in today's presentation may contain forward-looking statements, and we assume no obligation to update them. Our actual results may differ materially from what we are presenting, so please take the time to read the disclaimer and refer to the risk factors included in our most recent 10-K and 10-Q filings with the SEC. I now have the distinct pleasure of introducing Badri Kothandaraman, President and Chief Executive Officer of Enphase. But first, I hope you enjoy this short

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Enphase Energy, Inc.

Us29355a1079, renewable energy equipment & services.

• Enphase Energy : Investor Day 2021 Presentation

Transformation

Solar to Energy

INVESTOR DAY

NOVEMBER 16, 2021

Safe Harbor

Use of Forward-Looking Statements

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements concerning our anticipated financial performance and guidance, including revenues, gross margin, operating results, expenses and costs; our business strategies, including results of investments and acquisitions, and the expected size, trends and developments in markets in which we target and operate and in those to which we plan to expand; the anticipated capabilities, performance, and market adoption of Enphase's new technologies, products and product features; the expected capacity of components and the availability of our products; our planned sustainability efforts; our performance in operations, including in logistics, product quality, cost management, and by our suppliers; our anticipated performance in customer service and that by installers of our products; and our expectations as to the impact and evolving effects of the ongoing COVID-19 pandemic. Any statements that are not of historical fact, may be forward-looking statements. Words used such as "anticipates," "believes," "continues," "designed," "estimates," "expects," "goal," "intends," "likely," "may," "ongoing," "plans," "projects," "pursuing," "seeks," "should," "will," "would" and

similar expressions are intended to identify forward-looking statements, although not all forward- looking statements contain these words. All forward-looking statements are based on our current assumptions, expectations and beliefs, and involve substantial risks and uncertainties that may cause results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on our forward-looking statements. A detailed discussion of risk factors that affect our business is included in the filings that we make with the Securities and Exchange Commission (SEC) from time to time, including our most recent reports on Form 10-K and Form 10-Q, particularly under the heading "Risk Factors." Copies of these filings are available on the Enphase website at https://investor.enphase.com/sec-filings or on the SEC website at www.sec.gov. All forward- looking statements in this presentation are based on information currently available to us, and we assume no obligation to update these forward-looking statements in light of new information or future events.

Industry Information

Information regarding market and industry statistics in this presentation is based on information available to us that we believe is accurate. It is generally based on publications that are not produced for purposes of economic analysis.

Non-GAAP Financial Metrics

• The Company has presented certain non-GAAP financial measures in this presentation. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can be found in the Appendix to this presentation. Non-GAAP financial measures presented by the Company include non-GAAP gross margin, operating income (loss), adjusted EBITDA, and free cash flow.
• These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. Enphase believes that these non- GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.
• As presented in the "GAAP to non-GAAP Reconciliation" page, each of the non-GAAP financial measures excludes one or more of the following items for purposes of calculating non-GAAP financial measures to facilitate an evaluation of the Company's current operating performance and a comparison to its past operating performance:
• Stock-based compensation expense. The Company excludes stock-based compensation expense from its non-GAAP measures primarily because they are non-cash in nature. Moreover, the impact of this expense is significantly affected by the Company's stock price at the time of an award over which management has limited to no control.
• Tariff refunds. This item represents approved tariff refunds, and interest income earned on those refunds, by the U.S. Customs and Border Protection that qualify for the tariff exclusion on Chinese imported microinverter products that fit the dimensions and weight limits within a Section 301 Tariff exclusion under U.S. note 20(ss)(40) to subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States. Approved refunds relate to tariffs previously paid from September 24, 2018 to March 31, 2020 and are excluded from the non-GAAP measures as the refunds are non-recurring in nature for tariff costs incurred in the past and are not reflective of the Company's ongoing financial performance.
• Restructuring and asset impairment charges. The Company excludes restructuring charges due to the nature of the expenses being unplanned and arising outside the ordinary course of continuing operations. These costs primarily consist of fees paid for restructuring-related management consulting services, cash-based severance costs related to workforce reduction actions, asset write-downs of property and equipment and lease loss reserves, and other contract termination costsresulting fromrestructuring initiatives.
• Acquisition related expenses and amortization. This item represents expenses incurred related to the Company's business acquisition, which are non-recurring in nature, and amortization of acquired intangible assets, which is a non-cash expense. Acquisition related expenses and amortization of acquired intangible assets are not reflective of the Company's ongoing financial performance.
• Reserve for non-recurring legal matter. This item represents a charge taken for the potential settlement cost related to a dispute with a vendor. This item is excluded as it relates to a specific matter and is not reflective of the Company's ongoing financial performance.
• Non-recurring debt prepayment fees and non-cash interest expense. This item consists primarily of amortization of debt issuance costs, accretion of debt discount and non-recurring debt settlement costs, because these expenses do not represent a cash outflow for the Company except in the period the financing was secured or when the financing was settled, and such amortization expense or settlement of debt costs is not reflective of the Company's ongoing financial performance.
• Loss on partial settlement of convertible notes. This item is reflected in other income (expense), net and represents (i) the difference between the carrying value and the fair value of the settled convertible notes and (ii) the inducement loss for the difference between the value of the shares issued to settle the convertible notes and the value of the shares that would have been issued under the original conversion terms with respect to the repurchased Notes due 2025, which is non-cash in nature and is not reflective of the Company's ongoing financial performance.
• Change in fair value of derivatives. This item is reflected in other income (expense), net and represents changes in fair value of the conversion option in the convertible notes due 2025, as well as the convertible note hedge and warrant transactions, which is non-cash in nature and is not reflective of the Company's ongoing financial performance.
• Non-GAAP income tax adjustment. This item represents the amount adjusted to the Company's GAAP tax provision or benefit to present the non-GAAP tax amount based on cash tax expense and reserves.
• Adjusted EBITDA. When calculating Adjusted EBITDA, in addition to adjustments described above, the Company excludes the impact of cash interest expense, net of interest income, income tax provision (benefit) and depreciation and amortization.
• Free cash flow. This item represents net cash flows from operating activities plus deemed repayment of convertible notes attributable to accreted debt discount reported in operating activities and payments for acquisition reported in operating activities less purchases of property and equipment.

Kothandaraman

Chief Executive Officer

This is an excerpt of the original content. To continue reading it, access the original document here .

Attachments

• Original Link
• Original Document

Enphase Energy Inc. published this content on 16 November 2021 and is solely responsible for the information contained therein. Distributed by Public , unedited and unaltered, on 16 November 2021 20:06:10 UTC .

Latest news about Enphase Energy, Inc.

Chart Enphase Energy, Inc.

Company Profile

Income Statement and Estimates

Analysts' consensus, quarterly earnings, rate of surprise.

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Enphase: Losing The Battery War

• The residential solar industry in the US is still in its infancy, with only 5% of single-family homes having solar panels, 44% of which are in California.
• Enphase dominates the US inverter market with microinverters, but faces challenges with the rise of battery technology in residential solar.
• Tesla's Powerwall 3 poses a significant threat to Enphase's battery technology, as it offers a more cost-effective and efficient solution for solar + storage.
• Exposure to consumer spending, interest rates, and regulation increases Enphase's risks.

Eloi_Omella/E+ via Getty Images

The residential solar industry in the US is still in its infancy, with less than 5% of single-family homes having solar panels installed. Of these, a whopping 44% are in California, where installs are over six times as common as they are in Arizona, the next leading state in terms of installs. These are the very early innings of solar becoming a more popular product.

In these early innings, Enphase Energy, Inc. ( NASDAQ: ENPH ) has come to a fairly dominant position, forming a duopoly with rival SolarEdge Technologies, Inc. ( SEDG ) that accounts for about 90% of the US inverter market share.

There is a clear distinction between the two companies, as Enphase sells microinverters while Solar Edge sells string inverters. As a primer, solar panels produce DC electricity, but your house consumes AC electricity. Enphase's microinverters thus turn DC electricity into AC electricity at the panel level, such that each panel has its electricity converted as soon as it is produced. In a string inverter, the DC energy is all passed along to a larger central inverter that converts all the energy to AC in one location.

Historically , string inverters were invented first and remain dominant worldwide, especially considering that larger utility-scale deployments all use string inverters. Early string inverters had a particular problem, however, and Enphase was founded in order to address it.

The problem is the so-called Christmas-light effect , where if one panel in a string was shaded or underperformed for any reason, then the whole string would be brought down to match that poorly-performing panel.

However, due to advances in solar panels themselves and maximum power point tracking ( MPPT ), this problem largely does not exist anymore. Microinverters still outperform simple strings when conditions for solar are poor, such as heavy shading or multiple array angles, but it is also possible to add solar optimizers to accomplish the same thing as a microinverter without having the actual electrical conversion take place at the module level.

This background is important because Enphase's technology was created to solve a problem that we can now solve in multiple other ways. This leaves Enphase in an awkward spot moving forward, especially when we consider the future of residential solar. I believe that the rise of battery technology will ultimately be a headwind for Enphase, as its technology is particularly poorly suited to solar-plus-storage solutions. As the residential solar market matures, competitors with more relevant technology will be positioned to take market share.

Micro vs. String Inverters

When considering installing solar on your home in the US, one of the biggest decisions is whether to go with a traditional string inverter or with Enphase's microinverters. They both have their pros and cons, and I can really understand both sides. I do not wish to rehash the entire argument, as my thesis is focused more on the energy storage side of things. However, I do want to point out a few relevant qualities.

First, the inverter is potentially the most expensive and most important component in a solar installation. Do we really want them installed on the roof, exposed to extreme heat ( over 150 degrees ), wind, rain, squirrels, and so on? A string inverter can be installed indoors at the easily accessible ground level, where it should be much safer and less exposed.

Enphase proponents will point to the industry-leading 25-year warranty attached to their microinverters to refute this. There is also the argument (made even on their latest conference call ) about having "No single point of failure." The argument is that if a string inverter goes down, the whole system is useless. But if an Enphase microinverter goes down, only that panel is affected.

There is some very important information to consider as well. An Enphase system requires more components than simply the microinverters. For them to work, a combiner box is needed. For them to work without the grid, a system controller and a load controller are also needed.

Those are expensive components that represent single points of failure. If the combiner box goes down, all the microinverters will be useless until it is repaired or replaced. The important fact is that according to Enphase's warranty information , the combiner box only has a 5-year warranty. The load controller also only has a 5-year warranty, and the system controller is 10 years.

While on the topic of warranty information, the microinverter warranty only applies if all the devices are "continuously connected to the internet." A homeowner who changes their Wi-Fi password, then, must always remember to update their solar system, lest they risk voiding their warranty. This is not very confidence-inspiring and makes me seek a simpler product.

Home Energy Storage

Apart from all the traditional debate surrounding which inverter technology is better, microinverters have one glaring weakness: batteries.

Power stored in a battery is stored as DC, and no inverter is 100% efficient. Every time electricity is converted from AC to DC, and vice versa, some power is lost. For an Enphase system with an attached battery, then, inverter loss occurs three times: DC power from solar panels is converted to AC by the microinverters, which is then converted back to DC to be stored in the battery, which is then converted back to AC to be used by the household. This is silly from an engineering perspective.

Contrast this with a string inverter, where power is only ever converted once. DC power from the panels can be sent directly into the battery, where it is stored in its original state, and only converted to AC when it is used by the household.

Enphase claims 90% efficiency for its latest 5p battery, meaning that 10% of energy is lost every time it flows through the battery. The exact percentages are not as relevant as the fact that Enphase microinverters are more expensive than traditional string inverter systems. The benefit is that they are more efficient, helping to offset the increased cost. When a battery is added to the equation, however, it actually becomes less efficient than string systems.

Further, when using a string inverter, adding a battery is only adding a battery. Each Enphase battery, however, comes with 6 embedded microinverters inside the battery. So every time you add a battery you have to add a battery and more inverters. For this reason, Enphase batteries cost around $640/kwh, while a DC battery costs around $250/kwh. This is going to have massive ramifications for the payback period or return on investment.

The Rise of Residential Batteries: NEM 3.0

Part of my thesis is that residential batteries are about to become much more popular. Firstly, battery prices have come down about 90% in the last decade. This trend is set to continue as many of the best minds and deepest pockets in the world research new battery technology. As batteries become more affordable, the economics start to make more sense for homeowners.

As a result of regulation, we are already seeing this play out in California. Before California's new NEM 3.0 policy, homeowners could "sell" any excess power that they produced through solar back to the utility. Now they cannot, or at least they receive much less for their extra power. To compensate for this, there are dramatic new time of use (TOU) incentives, making power cheap at night and expensive during the day. With a battery, a homeowner can thus take advantage of cheap nighttime rates to charge their battery and discharge it during the day when rates are much higher. As a result , "under NEM 3.0, the payback period for a solar-plus-storage installation is now faster than for a solar-only install." In essence, solar alone got less attractive, while solar-plus-storage got more attractive.

Enphase confirms this in their latest earnings call: "As of last week, 60% of our California installations were NEM 3.0. These systems have a high battery attach rate over 90% compared to NEM 2.0 systems, which have an attached rate of 15%."

This represents a huge market shift, where demand for batteries is skyrocketing. In the third quarter, in both Europe and California, microinverter sales were essentially flat, but battery sell-through was up 14-18%. More and more of the financial results are being driven by battery sales, and this is set to continue. Here is a picture of Enphase's recent financial performance :

Enphase Q2 Investor Presentation

Not a pretty picture. And this is despite continued growth in the battery business, from 75.5mwh in Q1 to 120mwh in Q2 and guiding for 170mwh in Q3 at the midpoint, much of this growth coming from California.

Competition

Batteries are exploding in popularity, given NEM 3.0 regulatory changes in California. Enphase has been profiting from and continues to expect to profit from this expansion. However, batteries are the primary weakness of Enphase's technology.

Currently, if you want Enphase batteries to work as a backup in your system, you not only have to buy the battery (and the extra inverters in them), but you also have to purchase a $2k system controller and $500 load controller . Even the CEO recognizes how far behind they are in the battery technology game:

Backup is a little more complex. There are going to be more dollars the user has to shell out because the useful backup probably is about 20 kilowatt hours battery and for backup we are streamlining our balance of systems.

They are working on "streamlining" what is needed because having to add all these extra parts just to add a battery is understandably not what people want. Again, the CEO himself recognizes this when he states directly: "As batteries become more common in California, there is some interest in a centralized inverter solution." You can bet this is an understatement, as companies rarely highlight demand for their competitor's products. As it stands, only half of Enphase installs in California actually use an Enphase battery. So customers are choosing to use Enphase's microinverters with a competitor's battery.

Tesla Powerwall 3

Two different analysts picked up on this weakness, especially in contrast to the success of Tesla's ( TSLA ) recently released Powerwall 3:

When it comes to the 50% of your NEM 3.0 systems that are attaching a rival's battery, I think we've been assuming that's mainly been Tesla Powerwall 3... Can you talk about the competitive landscape at all? Just thoughts around some reports Tesla Powerwall 3 gaining traction...

As background, Tesla made waves when it released its original Powerwall in 2015, as there was not anything else like it on the market. The second Powerwall was released in 2016 at double the capacity and power of the original. Since then, they have essentially dominated the home energy storage market, with a market share at the end of last year of around 47% compared to Enphase with the second-highest at just 17%. As storage gains popularity, there is little reason to think that the Powerwall will not continue to dominate.

Compared to its predecessor, the new Powerwall 3 is 57 pounds lighter, can support 6 strings of solar vs. 4, and has double the output power (continuous and peak) and solar input capability. Plus it is a string inverter and battery all housed in one sleek unit.

To get the same power output from an Enphase 5p battery, you would need three of them, at a price of $3,200 each (on sale), more than the $9300 for the Powerwall. From a capacity perspective, the Powerwall comes in at a more expensive $810/kwh vs. $640/kwh for the Enphase.

But the Powerwall is also a solar inverter! The Enphase IQ8A can support a 400w panel for $223, or $0.58/watt. The Powerwall can support 20kw. To add that much solar with Enphase microinverters would cost another $11,600.

This would be maximizing the Powerwall. But let's suppose a more common solar system size of 14kwh with 11.5kwh of battery capacity. The Powerwall can handle this for $9,300 .

The Enphase system, at $640/kwh for the battery and $0.58/w for the inverters, would cost $7360 + $8120 = $15,480.

That leaves a whole lot of wiggle room. Remember that yes, the microinverters will be more efficient at collecting sunlight, but the Powerwall will recoup some of this by only having to convert the energy once as opposed to three times.

The Powerwall is the current market leader in solar + storage. Running these numbers, I just do not see a path for Enphase to close that gap. The product is just too expensive, and the technology does not make sense once batteries are added to the equation. With energy storage, including the Powerwall, achieving record profits and being the bright spot of Tesla's earnings , I do not see Tesla slowing down their momentum.

My base case is that home battery adoption will continue to increase as the technology improves. Electric vehicles are also forms of home batteries. Solar panels can send energy straight through a string inverter into an EV battery. An Enphase system would convert the energy to AC, and then have to convert it back to DC to charge the car. Any gains from the microinverters will be potentially wiped out by the extra conversions needed.

Enphase's Strategy

The question remains, why has Enphase been so successful in the US residential market thus far? They have been extremely proactive with their dealer and installer network, such that their systems are always presented to the consumer, sometimes with very few other options. This slide highlights their strategy, in a string of seven acquisitions over the past few years:

These are all companies tangential to inverter technology, focusing instead on sales and distribution. They make this explicit in their "Installer Platform" focus:

Enphase has gained market share not necessarily by having the best product (although their product was much more competitive in the past before batteries were as common), but by having the best distribution and installation network. They want to own every step of the process.

As Jeff Bezos famously quipped, "Your margin is my opportunity." Tesla is distracted by being a car company, but if they woke up one day and decided to take over residential solar, I believe that they could. More importantly, residential solar is still in its infancy. If it continues to gain traction outside of California, there is too much opportunity for other companies to step up and offer homeowners alternatives that make more financial sense. This might not happen in the next quarter or two, but in the next decade, I see it as likely.

Financial Performance

Enphase was one of the big winners in the post-pandemic period, when consumers were flush with cash and interest rates were close to 0. Since then, financial metrics have fallen off a cliff.

Seeking Alpha

Using TTM non-GAAP earnings of $2.34 and a stock price of 108.9, this gives us around a 46 p/e ratio. That kind of valuation would necessitate a very high growth rate.

Enphase has three exposures that materially affect its business and are outside of their control. They are heavily exposed to consumer discretionary income, as solar installations are low on the priority list during a recession. So Enphase relies on a strong economy in general.

Enphase is also reliant on low interest rates to improve economics for customers, a fact they mentioned three times in their conference call.

Lastly, Enphase is reliant on public policy. Their business in California is entirely dependent on regulation, swinging from one extreme to the other depending on the current energy policy. In the Netherlands, an important market, Enphase explained disappointing results by stating that "The country's solar demand continues to be challenged by regulatory uncertainty."

There are far too many variables here to make it a compelling long-term investment case. I contrast Enphase to First Solar, Inc. ( FSLR ) whose business model, focusing on technology, manufacturing, and utility-scale, is much more insulated. It is not as heavily exposed to consumer spending, interest rates, or government regulation (as both parties are interested in protecting domestic manufacturing). For exposure to the solar industry, FSLR is a much better bet, trading at a lower P/E with higher future growth expected as well.

Upside Risks

Since I am assigning a sell rating, the risks to my thesis are to the upside. Enphase has a strong net cash balance sheet and healthy margins, so I am not predicting an immediate demise. I believe they will lose out to competitors in the long run, but in the short term, demand for solar will be the primary driver of their performance.

SunPower's recent bankruptcy and SolarEdge Technologies, Inc.'s (SEDG) ongoing woes do not bode well for the industry. There is a world in which a soft landing allows the US to lower interest rates while avoiding significant economic distress. Enphase may do well in such an environment, even capitalizing on the failures of their peers.

Regulatory changes friendly to solar in states other than California could also provide a significant boost, as Enphase is in the best current position to expand their offerings.

I do not see Enphase as a short, just a stock that I would not hold. I see TSLA continuing to take more market share with the Powerwall 3, and FSLR is a much better play to the upside in the solar industry.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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