Since I first wrote Solar Storms back in August, as a Red Flags Alert, SolarEdge has been crushed – plunging 50%.
Enphase also took a hit, but then rebounded… and until today was above where I first flagged it. It’s now down 6%, with much of that decline happening today.
I have no idea what has hit the stock, but whatever the reason, here’s what you need to know…
Enphase ($ENPH) and SolarEdge ($SEDG)make inverters, boxes attached to the solar panels which convert electricity from DC to AC so it can be used to power your home. They’re viewed as having a duopoly in residential solar.
One reason SolarEdge got hit so hard and stayed down was that it has considerably more exposure to Europe, where there was an enormous glut of inventory and a surge of competition from China.
By contrast, 65% of Enphase’s business is in the U.S., which has its own solar-related issues. But even after offering harsh guidance, Enphase has captured the imagination of investors… in part because of how well it has done in the past.
What They’re Missing
But there’s a twist in the story, which those same investors seem to be missing. And it’s the reason my pal Russell Young of Decameron Capital, his family office, is short Enphase. And it’s why, despite its plunge, he is still short SolarEdge. (Note: As a result of a collaboration that I’ll be rolling out soon, I’ll be sharing some of Russell’s ideas going forward... plus those of a few others. Stay tuned!)
In Russell’s view, investors in both companies are missing the potential impact of Tesla’s newest solar battery, the Powerwall 3 (PW3.)
Before we go further, one thing I want to make exceedingly clear: This is not a bullish pitch or any pitch for Tesla, where “energy generation” is a sliver of sales and meaningless in the scheme of the Tesla story.
It’s about Tesla as a potential spoiler in the solar market, especially in California, which represents roughly half of all U.S. solar sales.
To understand why, look no further than changes in solar “net metering” rules in California – known as NEM 3.0, which went into effect last April. NEM 3.0 drastically slashed prices paid to homeowners for the solar power they produce. In effect, utilities no longer wanted the power, requiring new solar installations to have a battery to make it economical.
The catch: With batteries, the cost of a solar system skyrockets... by some estimates doubling the cost from a year ago. Batteries can easily add over $10,000 to the price of a new installation. And, with higher financing costs, push the payback period out considerably.
Price, Price, Price
That’s where Tesla’s batteries come in...
Based on Russell’s discussions with installers – coupled with prices that are starting to show up online – the PW3 dramatically lowers the cost of a battery system by Including an inverter in the battery itself, instead of on the side of the house. This is a big change. As a result, the PW3 is easier to install than other systems, making it more profitable for installers, as well.
In doing his field work, Russell says installers told him a typical 6,400 kWh system with a PW3 saves the homeowner $12,850 vs a traditional Enphase system with a cost of $42,500. That’s a 30% savings. To better illustrate it, he put together this chart...
Which is why, despite what you may think of its cars or its stock – or even Elon Musk – the Tesla brand is a potentially powerful seller at the kitchen table when the solar salesperson shows up… especially with system prices having soared. After all, everybody has heard of Tesla; few homeowners have heard of Enphase.
It’s a question even analysts are starting to ask, as was the case on Enphase’s most recent earnings call. In an apparent reference to Tesla, the analyst asked…
If a competing battery that has an integrated central solar inverter, do you see any sort of threat in some of these high-attach geographies where we could see a shift in preference over power architecture?
. Enphase Chief Products Officer Raghuveer Belur responded, in part…
We have a very strong value proposition vis-à-vis centralized or string inverter topologies, the better performance, much higher reliability, much simpler to design, install and maintain, as well as safety around not having any high voltage DC in our system.
In other words, his view is that the microinverter – and not just any microinveter, but Enphase’s – is better.
And maybe it is… or was. Full disclosure: Both Russell and I have Enphase inverters on our houses in California – both installed quite a few years ago, when there was no question about which type of inverter to get.
And even then, after listening to hour-long after hour-long sales pitch by different solar companies, the decision often boiled down to which type of inverter.
The problem for Enphase, as Russell sees it, is that with the new rules in California, everything has changed…
Pulling on a String
Now, Tesla's string inverter acts more like a microinverter. Old string inverter systems connected every solar panel together, so shading from a tree on one panel, caused electricity produced to fall on every panel, dramatically impacting the array's performance.
Tesla, it appears, has solved this problem with a technology that mimics microinverters. Tesla argues in a white paper that its system results in a superior return on investment in 92% of residential installations.
Installers also tell Russell that changes to building codes are more favorable to string inverters.
Under the old regime, microinverters were superior because they maximized electricity production when it was most expensive. You can see that in Enphase’s stock price, which at its peak was nearly triple its current levels. But in this new world of solar, batteries are the center of a solar installation – now often billed as an energy system instead of a solar system – and Tesla's approach delivers what currently appears to be a superior return on investment.
Bottom Line…
The obvious question is whether Enphase will find itself in a price war. With operating margins of around 22%, a need to lower prices could be a shock to profitability.
As a result, the red flag remains.
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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) I do not have a position in this stock.
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter (X) and Threads @herbgreenberg.
Hi herb. Great piece just a side note -I have solar lots of panels and all ENPH micro-inverters- I have had a Tesla powerwall 3 on order for 3 years never a call or text asking when they can come install. I have 2 Teslas in driveway but no powerwall:) -LADWP -no idea why…..
Terrific piece