Wednesday, September 8, 2010 Power-One (PWER) Poised to Invert Solar Stocks

TweetThis has a lengthy piece on our most recent addition to the portfolio Power-One (PWER).  Normally, I like to do an indepth write up on a stock the first time it is introduced, but since it was part of a larger bevy of purchases I did not have the time.  This article actually does a quite good job, so I won't recreate the wheel.  The situation here is very reminiscent of Polypore International (PPO) where you have a new high growth secular component (lithium) within a relatively staid business... with Power-One these inverters are taking off.  But I guess since it is not in an ETF the institutions will ignore it, until Cramer pumps it one evening at 6:18 PM as a "stock you've never heard of".  [Aug 26, 2010: [Video] Cramer Nation Introduced to Polypore International]  For now, as they have the past 3-4 years, the retail crowd remains obsessed with the module portion of the solar market.

  • According to independent figures released this week by IMS Research, Power-One now claims 11% market share of the global Photovoltaic (PV) market. In less than two years, Power-One has jumped from ninth place in 2008 to second at the end of the second quarter of 2010. 

From the last earning's report....
  • Renewable Energy Solutions posted strong sequential revenue gains in the second quarter 2010. Inverter and related product sales posted a record $142 million in revenue for the second quarter 2010, or a year-over-year increase of 745% from $17 million in the second quarter 2009.
The main question here is sustainability, obviously 745% year over year growth won't continue.  In most of these commodity business, things get overbuilt especially once the Chinese get involved, and then you have ugly price wars - exactly what happened up the food chain in solar modules the past few years. 


  • The most common photo-op for the solar sector is of course the solar panel itself, but some recent big flashes in the solar sector have come from camera-shy solar players, like inverter company Power-One (PWER).  The same preference for images of solar panels that has dominated the public perception of the solar sector carries through to the popularity of solar module makers with investors. Whether it is low-cost U.S. leader First Solar(FSLR), or one of First Solar's Chinese rivals, led by Trina Solar(TSL), it's the solar module makers that get most of the attention.
  • So it may not be among the proverbially "sexy" investment stories to perform the behind-the-scenes work of converting the DC current generated by solar modules into the AC current needed for the grid. Make no mistake, though, being underappreciated doesn't mean solar inverter companies don't deserve a look from alternative energy investors. Inverters are one of the most critical solar components for project developers of larger systems.
  • Consider that the solar inverter players, and specifically Power-One, are growing at a faster clip than many of the solar module companies. Power-One grew its inverter business from less than 1% of the global inverter market in 2007 to more than 5% in 2009 -- which made it the fourth-biggest inverter player globally, notably pulling ahead of German giant Siemens. By August 2010, Power-One claimed 11% of the global inverter market.
  • The rise of Power-One doesn't put it within arm's reach of German inverter giant SMA Solar Technology, which continues to dominate market share of the global inverter pie, but Power-One doesn't need to overtake SMA, or even come close, to deserve a look from investors.
  • A recent report from Stifel Nicolaus makes the claim that the solar inverter space is actually more compelling than the solar module market for investors. Stifel Nicolaus cites the pace of the market-share gains made by players like Power-One, and less intense cost pressure in the inverter space than that which exists for the solar module makers, as reasons why investors should not ignore these companies.  
  • Stifel Nicolaus projects solar inverter sales opportunities to reach above $4 billion by 2012, double the level in 2008.
  • Power-One shipped 529 MW of inverters in the second quarter. The solar company now has annual capacity of 2.5 gigawatts (GW) of inverters and expects to reach a run-rate of approximately 4 GW by the end of 2010.  The Power-One CEO predicted that the company's year-end capacity would equal roughly 15% to 20% industry share. Additionally, Thompson expects Power-One to grow to 7 GW capacity over the next few years, and continue to take market share.
  • Stifel Nicolaus estimates that global inverter capacity will reach 11 GW in 2010 and 2011, and as high as 14 GW by 2012.
  • Speaking of revenue growth specifically, the Power-One CEO said, "We will get down from the nosebleed level to more reasonable percentages, but we still see a healthy market growing 25% a year." Most importantly, the Power-One CEO claims that the inverter growth rate will continue to outpace the solar industry.
  • Power-One is also extending its geographic reach. The solar inverter company announced on Sept. 7 that it has set up manufacturing operations in Ontario, Canada, to take advantage of the new feed-in tariff for renewable energy in the Canadian province. It's largely European business base is changing. 
  • Power-One CEO Thompson described its expansion in Asia as aggressive. The Asian push includes not only a big footprint in China, but Australia and India as new markets of focus. Power-One is launching an inverter specifically for the Chinese market to take advantage of an opportunity projected to be as large as 5 GW by 2014 -- or as the Power-One CEO noted, as big as the German solar market today.  [Jun 19, 2009: Reuters - Incentives Add Shine to China's Solar Drive]
  • At this juncture in the evolution of the inverter space, the Power-One CEO downplayed any talk of a price war, and stressed that it is not the business aim of the inverter company to use price as a competitive weapon. Nevertheless, Thompson made no bones about being prepared to respond to the quick-change nature of solar pricing, if need be.  Over the next two to three years, low-cost entrants will enter the Chinese market and find success. But the fact that Power-One has a Chinese plant and a Chinese management team puts the inverter company in a position to compete against any low-cost entrant.
The last point is especially important - back in 2006/2007 I was very bullish on the solar module space until I realized that for ever 1 public company in the U.S. there were 10-20 back in China and Taiwan, and the coming competition would be awful.  [Jan 3, 2008: The Long Term in Solar]   They have been.  [Feb 6, 2009: NYT - Dark Days for Green Energy]

Power-One designs and manufactures energy-efficient power conversion and power management solutions, including inverters for alternative/renewable energy (solar and wind) and products for routers, data storage and servers, wireless communications, optical networking, semiconductor test equipment, industrial markets and custom applications. 

Long Power-One, Polypore International in fund; no personal position

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