Financial Analysis: Enphase Energy Inc.
Authors: Matthew Garcia and Alex Debayo-Doherty
Enphase Energy Inc. is a solar system and microinverter technology company, looking to disrupt the conventional relationship between solar systems and the grid. In our assessment of this company, we performed quantitative financial analysis, qualitative projective analysis, and acquainted ourselves with Enphase’s leadership and management. Enphase’s positive financial trajectory, innovative solar technology, and expansive growth potential signal the company’s promising future.
Enphase’s Concept:
Enphase operates in the solar inverter and home energy markets and produces a novel home energy system that consists of solar panels with built-in microinverters. This easily scalable rooftop solar array is connected directly to the grid, Enphase’s proprietary battery system (Enpower), and cloud-based monitoring software in the home (Enlighten). The duality of the system allows for reduced electric bills with grid buyback and a “grid autonomous” solar system that can provide power during a blackout.[i]
Quantitative Analysis[ii],[iii]:
Enphase operates in 21 countries and has over 500 employees around the world, over 300 issued patents, and 23 million inverters shipped to consumers[iv]. There are several quantitative metrics that we used to measure Enphase’s previous and current financial health. We analyzed Enphase’s profitability, leverage ratio, current ratio, cash conversion cycle, and times interest earned ratio.
In recent years, Enphase’s net income growth has been on a very positive trajectory. In 2016, net income fell 205.52%, hitting an all-time low of $-67.5 million. In 2018, the company experienced 75% net income growth but still remained unprofitable with a net income of $11.63 million. 2019 has been the first profitable year so far for the company, during which Enphase experienced a 745% increase in net income. To add to its impressive net-income trends, Enphase announced that it is projected to do $200–210 million in revenue in Q4 of 2019 alone.
The asset to equity (leverage ratio) is a number that relates the total assets of a company to the total equity of the company. In recent years, Enphase has rapidly reduced its leverage ratio, which is a good sign for the health of the company. In 2016, Enphase had a leverage ratio of 125.8, which is extremely high and signals asset financing with liabilities. In 2018 and 2019, Enphase reported leverage ratios of 43.7 and 3.44, respectively. These sharp improvements in Enphase’s leverage ratios indicate that the company is better positioned to finance its assets with equity, instead of liabilities.
The current ratio is a measurement that relates the total current assets to total current liabilities of a company. Since 2016, Enphase has continued to increase its current ratio, making it better positioned to reduce debt financing on financial obligations. In 2019, the current ratio is 2.66, which is very healthy for the company. A company’s quick ratio is similar to its current ratio, but inventory is subtracted from total current assets because it is an illiquid asset. The difference between Enphase’s current ratio and the quick ratio has steadily decreased every year since 2015, which is a good sign for the company. A similar quick and current ratio means Enphase can more easily liquefy their current asset to respond to immediate financial obligations in the short term.
In order to measure Enphase’s financial efficiency, we assess the company’s cash conversion cycle which measures how efficiently the company was selling its inventory, receiving payment on consumer purchases, and meeting its debt obligations. Days Inventory Outstanding (DIO) is a measurement in days of how quickly a company sells its inventory. A low DIO is a good sign for a company because they are moving their supply to the consumer. In 2016, Enphase had a DIO of 44 days which improved to 28 days in 2018 and -19.726 days in 2019. In 2019, the company’s DIO is negative because Enphase was unable to meet product demand, demonstrating the attractiveness of its product line to consumers. Days Payable Outstanding (DPO) measures how long it takes for a company to pay back its creditors. As a company, a high DPO is desirable because it gives the company more time to pay back liabilities, freeing up money to invest in company operations. In 2016, Enphase had a DPO of 46 days which increased to 84 days in 2018 and 85 days in 2019. The increase in DPO is likely attributable to Enphase’s decreased leverage position; in recent years, Enphase has been better poised to finance their assets with shareholder equity, allowing them to establish trust with creditors and achieve more favorable loan terms. Days Sales Outstanding (DSO) measures how many days consumers take to pay the company for goods. In 2016, Enphase’s DSO was 68 days. Since then, DSO has increased to 91 days in 2018 and 275 days in 2019. It is possible that the rapid increase in DSO is a symptom of increased consumer pre-orders and consumer financing options on units but given improved financial health in nearly all areas since 2016, we do not think it is an immediate cause for concern.
The last parameter we wanted to assess was Enphase’s ability to manage their debt expenses. To do this, we used the Times Interest Earned Ratio (TIER) which is the ratio of operating income to interest expenses. Enphase reported a negative TIER of -21.23 in 2016, which means they could not pay interest payments on liabilities using only operational income. The situation improved in 2018 when Enphase reported a relatively low TIER of 0.59, and in 2019 the company’s TIER rose to 8.33, which is a sign of a healthy company. This increased TIER shows that Enphase is now able to finance its interest payments with its core operational income, which is a good sign for future growth.
Leadership and Management[v],[vi]:
While we believe that quantitative analysis is important, we also value the leadership and management behind the companies we invest in. We believe that Badrinarayanan (Badri) Kothandaraman, who has been the President and CEO of Enphase since 2017, is a successful and capable leader. Badri studied at the Indian Institute of Technology before getting his Masters in Materials Science from the University of California, Berkeley. He later got his MBA from Stanford University Graduate School of Business. Badri has over 21 years of experience with product development at Cypress Semiconductor Corporation, where he managed 700-person teams, led business units with aggregate revenues of over $200 million, and helped regain the #1 Position in USB (C-type) with 4 first-to-market products. It is also important to note that while there has been a movement in the leadership of the company, the two Co-founders, Martin Fornage and Raghu Belur, are still managing Enphase’s technology and product management, respectively. Martin and Raghu’s emphasis on the importance of R&D and product development, while supporting talented business operators who can run the company, ensures that the company will continue to innovate in the future.
Market Analysis[vii],[viii]:
Enphase and its primary competitor, SolarEdge, share 90% of the U.S. solar inverter market. Looking forward, one durable advantage that Enphase will have over its competitors like SolarEdge is its original equipment manufacturer (OEM) partnerships. Enphase has long-term partnerships with solar panel manufacturers like Panasonic, Solaria, and Sunpower that allow its microinverters to be installed onto the solar panels during the manufacturing process. This in-factory installation creates a path dependency for consumers and third-party installers because Enphase’s microinverters will be included on manufactured solar panels before they are installed for the consumer.
Unlike many other solar systems, the Enphase IQ System consists of solar panels with built-in microinverters that form a parallel circuit. A microinverter is a device that converts the direct current (DC) power generated from the solar panels into alternating current (AC) power that can be used in your home or transferred to the grid to reduce your energy bill. One advantage of using microinverters rather than a central inverter is that there is no central point of failure; while a central inverter can disable an entire solar array, a microinverter failure disables only an individual panel.
Traditional solar panel systems arrange solar panels in a string (series circuit), which means that a panel’s performance depends on the performance of other panels on the circuit. In the Enphase IQ System, if one of the panels breaks or experiences a decrease in power output (shade, dust, etc.) power output from the entire array is not affected. The parallel organization of the Enphase IQ system also means that the solar array is incredibly modular and scalable; no system changes are required to increase or reduce the size of the solar array.
Traditionally, solar systems that are connected to the grid need to be shut down in the event of a blackout in order to protect electrical workers from excess electricity that a solar system might be sending into the grid. Enphase’s newest system — the Ensemble System — contains the Enpower Smart Switch that automatically disconnects the solar system from the grid if a blackout is detected. This “grid-agnostic” solar system can continue to supply power to the home and to the Encharge battery system, which can be discharged at any time. Homeowners can also monitor the status of their solar system’s output, the storage capacity of their Enphase battery, and other metrics through Enphase’s Enlighten software.
The attractiveness of Ensemble’s all-in-one system is particularly pertinent in geographic regions prone to power outages. The ensemble has the capacity to change power access in places like Puerto Rico, coastal America, and the Pacific Islands, where tropical storms and hurricanes are frequent. Wildfires — like those in Australia and California — are becoming increasingly common, and often result in intentional blackouts or damage to the power grid. As climate change increases the frequency and strength of natural disasters, grid-agnostic solar systems like Ensemble will be a crucial, reliable, and sustainable source of power.
We believe one of Enphase’s greatest strengths will be its role in bringing power to nearly 1.3 billion people without it. In regions where grid infrastructure is scarce, an autonomous solar system would be invaluable in introducing electricity to the parts of the developing world where it is currently inaccessible. The Ensemble system could power water pumps, lights, and other basic electrical technologies that would jumpstart economic activity and innovation in regions like sub-Saharan Africa, parts of India, and South-East Asia.
Currently, Enphase faces competition from other inverter manufacturers like SolarEdge, which manufactures centralized inverters for solar systems. As part of the U.S. trade war with China, Huawei, a Chinese technology equipment manufacturer and the largest global manufacturer of inverters, was recently placed on the U.S. trade blacklist. In the last year, Enphase has capitalized on Huawei’s exit from U.S. markets. In September, Citron Research, a newsletter focused on short-selling, published a paper predicting that Generac Power Systems, a 5-billion-dollar company that manufacturers backup generators, would enter the inverter market and dilute Enphase’s market share. We believe that the opposite is true; the Ensemble solar system — which enables solar power generation and battery discharge during blackouts — is a direct threat to the more antiquated backup generator market. Autonomous solar systems are technologies of the future, and Generac’s decision to enter the solar market was likely a defensive move. For this reason, we think Citron’s prediction that Enphase’s stock will fall 75% is exaggerated and are not concerned about competition between Enphase and Generac.
Conclusion:
Enphase Energy Inc. is a company with an innovative product line, an impressive stake in the solar inverter market, and massive growth potential domestically and abroad. Our quantitative analysis determined that since their financial slump in 2016, Enphase has improved across the board, reporting a positive net income, improved leverage position, more liquefiable current assets, a cash conversion cycle reflective of a company with high demand and strong creditor relationships, and greatly improved interest financing. Huawei and Generac are positioned to introduce competition and dilute Enphase’s market share; however, Huawei’s U.S. ban and Generac’s late entry into the market minimize these companies’ threats to Enphase. The Enphase team is led by a proven business management expert with the founders overseeing technological development to ensure the company is innovative and competitive in the future. After assessing Enphase’s strong leadership, impressive product line, and growth potential, we believe that Enphase is positioned to outperform the market in the medium and long run.
Disclaimer: All of our research and thoughts are based upon publicly available information. We can not verify anything that was published online aside from the reputability of the sources. We are an unbiased source and have no connection with Enphase Energy Inc.
