Analysts say buy the dip in Enphase and SolarEdge as Tesla launches new solar product

Published Wed, Jan 20 20219:16 AM ESTUpdated Wed, Jan 20 202110:19 AM EST

Enphase Energy and SolarEdge Technologies are bouncing back after last week's sell-off, as analysts say investors should buy any weakness in the names after Tesla launched a new solar product. The leg higher comes after Enphase and SolarEdge fell 8.73% and 15.84%, respectively, on Friday, on the heels of Tesla's entrance into the solar inverter space, which is dominated by the two players. "We believe the selloff is overdone and recommend buying the weakness," JPMorgan's Mark Strouse wrote in a note to clients Tuesday. "We believe investor concerns around the risk of TSLA significantly impacting the US resi inverter duopoly of ENPH/SEDG may be overstated at this point," added Goldman Sachs' Brian Lee. According to estimates from Bank of America, Enphase and SolarEdge currently hold roughly 90% of market share across the U.S. residential solar market for microinverters and power optimizers, with each also growing its international presence. Tesla's new product offering is a string inverter, which is different from the microinverters and power optimizers currently offered by Enphase and SolarEdge, respectively. Inverters convert the direct current generated by solar panels into alternating current that can be used for homes or exported to the grid. Tesla's inverter can connect to the internet making it a smart inverter, but it doesn't include module level power electronics, such as those offered by SolarEdge and Enphase. While these can be more expensive than string inverters, they have grown in popularity since they are more efficient. With a string inverter, if one solar panel in the series breaks it impacts the power output of the entire chain. With microinverters, however, each panel has its own inverter, so issues that arise, such as shade covering one panel, won't impact the entire system. Tesla currently has exposure to the residential solar market through its SolarCity division. However, in recent years SolarCity has lost market share to competitors including Sunrun and Sunnova. Goldman's Lee said that Tesla launching its own inverter is likely to impact SolarEdge since the two have historically had a supply partnership. But he estimates that sales to Tesla currently amount to between $25 million and $30 million annually, or roughly 2% of SolarEdge's revenue. Given this, he said Friday's sell-off was "overblown." He also emphasized the moat around each company, citing the difficulty in bringing a new product to market. "We note that this is not the first time solar inverter stocks (ENPH/SEDG) have reacted negatively to the notion of new competitive threats in the market ... we note the stocks outperformed significantly over time as barriers to entry proved to be higher than initial investor fears and market share has continued to consolidate between the two players with little, to no, signs of new entrants gaining traction," he said. Tesla's new inverters are panel agnostic meaning they work with Tesla's panels as well as those made by other companies. JPMorgan's Strouse said that if Tesla decides to target third-party installers it would compete more directly with Enphase and SolarEdge. However, he does not envision material share loss for either company given that Tesla's product lacks module-level power electronics. JPMorgan has an overweight rating on shares of Enphase and SolarEdge, while Goldman holds a buy on Enphase while rating SolarEdge neutral. Bank of America also reiterated its buy rating on Enphase on Tuesday, calling the recent weakness a buying opportunity. On the flip side, Tesla entering the inverter space prompted Raymond James to reiterate its underperform rating on shares of Enphase, saying new entrants will weigh on margins. "Competitive pressures will, over time, lead to commoditization and margin erosion from the current lofty levels," the firm said in a note to clients. "Such commoditization will ultimately be beneficial for consumers and rooftop solar demand, even though the direct financial impact on Enphase's profitability would be negative." Enphase and SolarEdge advanced 5.6% and 4.5%, respectively, on Tuesday, and each stock also moved higher on Wednesday. Over the last year shares of Enphase are up roughly 540%, while SolarEdge has gained 181%. - CNBC's Michael Bloom contributed reporting.

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Enphase Energy and SolarEdge Technologies are bouncing back after last week's sell-off, as analysts say investors should buy any weakness in the names after Tesla launched a new solar product.

The leg higher comes after Enphase and SolarEdge fell 8.73% and 15.84%, respectively, on Friday, on the heels of Tesla's entrance into the solar inverter space, which is dominated by the two players.

"We believe the selloff is overdone and recommend buying the weakness," JPMorgan's Mark Strouse wrote in a note to clients Tuesday. "We believe investor concerns around the risk of TSLA significantly impacting the US resi inverter duopoly of ENPH/SEDG may be overstated at this point," added Goldman Sachs' Brian Lee.