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Inside Cirilium - Enphase Energy

UK: Suitable for retail and professional clients.

Date: 19 May 2021

Granahan US SMID Select Fund: Enphase Energy

The Cirilium portfolio managers have long and trusted relationships with many of the managers in which they invest, but they are also always on the lookout for the potential in new managers. In some cases this means spotting a fund that’s been overlooked because it’s too new or, as in the case of the Granahan US SMID (small and mid-cap) Select Fund, it means spotting the opportunity and showing our conviction with a cornerstone investment in a new strategy, which we did in 2020. Here we delve into one of the interesting companies held in the Granahan fund that, consequently, is also held by Cirilium investors.

Enphase Energy

Company background: Enphase Energy is a microinverter company primarily supporting residential solar installations globally. Founded in 2006, it has around 850 employees and is based in California but with offices around the world.

Its customers are primarily installers, homeowners and module partners, with more than 32m microinverters having shipped as of 31 Dec 2020, with approximately 1.3m systems in more than 130 countries. In 2020, Enphase Energy generated a revenue of $774.4m.

Investment rationale: Granahan fund manager, David Rose, was introduced to Enphase in 2018 as a turnaround story that was using a new technology platform to innovate with new products around solar installations that were more reliable, safer and versatile. At the time, the advent of these new products was already showing early signs of its potential to improve market share and margins.

A microinverter is a device that converts a DC electrical current generated by a single solar module into an alternating current. When compared to older string inverters, these devices electrically isolate the panels from one another so that small amounts of shade, leaf debris or snow on any one module, or a module failure, doesn’t reduce the output of the whole array, as well as maximising power extraction under all conditions.

As these new products gained significant traction and Granahan came to better understand the market dynamics, Rose and his colleagues realised their original forecasts significantly underestimated the potential profits to be made.

They went on to build a larger position before the broader market recognised this opportunity and added still more after attending a solar conference and witnessing an unwarranted sell-off in Enphase shares later in the same year.

The company is likely to continue to gain market share in an industry that will benefit from greater renewable energy usage globally.

Outlook: The investment thesis is grounded in the belief that the company will continue to gain market share and improve margins within a robust industry that will increasingly benefit from the move to greater renewable energy usage globally.

Enphase‘s other attractions to the Granahan team include:

  • A strong balance sheet;
  • An excellent, technology-driven, management team;
  • It’s competing against just one market leader with recent product reliability issues;
  • Consistent profit margin improvements;
  • The introduction of a new storage product offering that could double the company’s addressable market.

Conclusion: As one of the strongest contributors to the Granahan SMID Select Fund in recent years, this stock pick, and several others of similar calibre, help explain how Granahan’s fund was able to deliver a return in excess of 100% in 2020, having been added to the Cirilium Portfolios at the beginning of that year.

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