Will Rooftop Solar Inverters Become Commoditized? What Current Valuations Tell Us

After updating our modeling assumptions following second-quarter earnings, we lower our fair value estimate for Enphase ENPH to $120 per share from $140. Similarly, we reduce our SolarEdge fair value estimate to $216 per share from $238. The primary driver of our lowered valuations is a slight increase to our cost of capital assumption (100 basis points) and modest declines in our margin expectations. We reiterate our no-moat and Very High Uncertainty ratings for both companies. We view shares of SolarEdge as undervalued, while Enphase is fairly valued following the selloff in recent weeks.

Against a dynamic rooftop solar backdrop, we perceive a widening range of expectations for Enphase and SolarEdge among market participants. After we updated our models, our estimates are generally below sell-side consensus for both firms over the next couple of years. For SolarEdge, we are 6% and 9% below PitchBook consensus for revenue and gross profit in 2024, respectively. Regarding Enphase, we are 5% above consensus for 2024 revenue, but 12% below on gross profit, as we assume pricing concessions weigh on profits.

In attempting to reconcile our financial forecast with the current trading levels of both companies, we believe the market is implying different expectations for Enphase and SolarEdge. For Enphase, we believe the selloff to date is driven nearly entirely by lower revenue growth expectations for the company, with the market continuing to believe Enphase maintains best-in-class margins given its more differentiated microinverter solution. In contrast, current market expectations for SolarEdge imply a slowdown in revenue growth, but also seem to believe a degradation in margin levels to be more in line with commoditized peers.