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Most Profitable Part of the Solar Business Is Switching Currents


By Christopher Martin

(Bloomberg) The most profitable corner of the booming U.S. solar industry isn’t making — or even installing — panels. It’s building the components that keep electricity flowing to the power grid.

They’re called inverters, and the two companies that make the vast majority of premium ones in the U.S. reported their highest revenue ever in the second quarter, propelling their shares to record levels. Enphase Energy Inc., has gone from trading at less than a dollar to ranking among the world’s most valuable solar stocks with a market capitalization of $3.8 billion. Its slightly larger rival, SolarEdge Technologies Inc., has rallied 129% this year.

The systems Enphase and SolarEdge supply are crucial to making solar power work. Panels produce direct-current electricity that needs to be converted to alternating current so it can be carried into homes or sent to local power grids. That’s what inverters do. The ones Enphase and SolarEdge make are so specialized and cost-effective to manufacture that the companies have bigger margins than most other segments of the solar business.

“They’re better than anything in the industry,” said Jeffrey Osborne, an alternative energy analyst at Cowen & Co. “There’s nothing out there that I’ve seen that can compete” in terms of profitability.

SolarEdge reported record revenue of $325 million and profit that beat analyst’s estimates. Its shares jumped 25% to close at $80.30 on Tuesday. Last week, Enphase posted $134 million in revenue, up 77% from a year earlier, and said third-quarter sales may total as much as $180 million.

The two companies supplied 89% of the total U.S. market for module-level inverters last year, according to Wood Mackenzie Power & Renewable analyst Lindsay Cherry. They’ve kept their edge in the U.S. even as China’s Huawei Technologies Co. and Sungrow Power Supply Co. dominate the global market. That’s in part because Huawei canceled plans earlier this year to enter the U.S. market after lawmakers suggested a ban on their technology.

Both SolarEdge and Enphase gave earnings projections that beat analysts’ estimates as demand for solar rebounds. Wood Mackenzie Power & Renewables and the Solar Energy Industries Association projected that photovoltaic capacity installations in the U.S. would rise 14% in 2019 after a two-year slowdown. A global index of solar stocks maintained by Bloomberg has surged almost 30% in 2019 after declining in four of the previous five years.

Fraction of the Cost

Inverters represent just a fraction of the total cost of a rooftop solar system. For a typical $15,000 panel installation, an inverter may price at about $1,500. But they’ve proven to be the source of many breakdowns, and buyers have grown comfortable with the quality of Enphase and SolarEdge products, Osborne said.

The type of “smart” inverters that Enphase and SolarEdge make has also given them a leg up. These components isolate issues on an individual panel so they don’t affect the output of an entire system. And they can be easier to integrate with batteries, an attractive proposition for installers trying to sell solar-plus-battery combinations.

The biggest threat facing the two manufacturers may be each other. “Investors have been fiercely debating whether Enphase is taking or will take market share from SolarEdge in the U.S.,” Philip Shen, an analyst at Roth Capital Partners, said in a research note. He went on to say, “We believe the global growth of distributed solar is big enough for both.”



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