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Enphase Vs. Satcon. And the winner is…

July 5, 2012

As the solar industry continues to head towards more contraction, the solar inverter industry is naturally headed towards the same. Fortunately for the inverter companies, there are less of them, and the opportunities for acquisition are greater, than their solar brethren.

The leader of the inverter industry is Power-One (PWER :NASDAQ). With its $226 million in net revenues in Q1 2012 and its $0.03 earnings per share place it in the leadership position amongst its fellow inverter companies. If you are looking for a relatively safe investment in the inverter industry, Power-One is your choice.

This brings us to industry stalwart Satcon (SATC :NASDAQ) and industry upstart Enphase (ENPH :NASDAQ).

For a long time, we liked Satcon. The Boston-based company has a solid line of products and was a frequent choice for large-scale utility projects. They also have a solid client list that included Q-Cells, Southern California Edison (EIX :NYSE), and Constellation Energy (CEG :NYSE).

But the decline in solar sales has deeply affected the company as revenues have been in steady decline, forcing the company to hire a new CFO last year (never a good sign) and endure layoffs and restructuring.

And despite achieving the #1 position in the North America solar inverter market in Q1 2011 according to IMS Research, Satcon has shown that being king of the North American solar market doesn’t mean a lot.

Q1 2012 revenues for Satcon were $24.3 million, a 61 percent decline from the same quarter in the previous year. The net loss per share rose 450 percent from $0.02 in Q1 2011 to $0.11 in Q1 2012. Whether or not the layoffs and the company’s focus on North America, China, India, and Thailand will turn the company around remains to be seen.

This brings us to Petaluma, California-based Enphase. Long before their IPO launched in April of the year, Enphase was a darling of the solar industry with their microinverters and their ability to convert DC power to AC power. Solar installers were clamoring for the company’s inverters and often had a hard time obtaining them.

And while Satcon has been seemingly focused on the utility-scale market, Enphase has solidified its roots in the residential solar market buy solidifying distribution deals with AEE Solar, groSolar, Solar Depot, and many other solar distributors.

Revenues are on the rise at Enphase as the company posted a 136 percent year-over-year increase with its $42.6 million in Q1 2012.

Unfortunately for Enphase, profits remain elusive and probably will for quite a while. The company is spending sizeable amounts on R&D and marketing and will probably continue to do so.  And with its cash on hand declining, it’s only a matter of time before the company issues more shares resulting in further dilution to its investors.

But as a newly anointed member of the Russell 2000, Enphase saw a little lift in its share price. Retaining that momentum will be difficult as the company needs to show some concern about profitability.

So which one should you buy? The safer play is definitely Enphase. With revenues heading in the right direction, a savvy CFO should be able reign in the company’s expenses and get them nearer to profitability. But with the company using its cash at a fairly rapid rate, it might be safer to wait to purchase shares until after it issues more.

Should you stay away from Satcon? Only if a lot of risk concerns you. While Enphase is currently focusing its international efforts on the seemingly limited UK market, Satcon’s choice to focus on the potentially far more lucrative markets of China and India makes a lot of sense.

And of the two companies, Satcon looks fairly attractive as an acquisition. Unfortunately, the most logical suitors would be one of the China-based solar companies. But Suntech Power (STP :NYSE), LDK (LDK :NYSE), and Canadian Solar (CSIQ :NYSE) aren’t currently in the financial position to make that type of purchase.

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