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Solar Returns to IPO Market After a Long Hiatus

The first new solar IPO, Enphase Energy, which will price on Friday, represents a niche in the solar market that is distinct from the general solar supply chain woes and global supply/demand imbalance. BrightSource Energy, which builds large-scale solar thermal projects employing a unique solar concentrating tower technology, is planning an April IPO. BrightSource is the more controversial offering of the two, having scrapped its IPO last year, and as a number of analysts have pointed out, offering investors an S-1 that raises as many questions as it answers. For that reason, this article will focus on this week's solar IPO.

Enphase will price its IPO -- originally expected at $10 to $12 -- on Friday. The deal price range was lowered to $6 to $7 this week, no surprise to several analysts TheStreet consulted who described the planned range as being too high to generate investor excitement.

The U.S. company is in the solar niche of microinverters, which contrary to the larger sector woes, has been booming. Microinverters are used on small-scale solar projects (typically less than 10 kilowatts) to regulate the voltage. The inverter is a key component in any solar system, regulating the electricity generated by the panels and ensuring overall system efficiency, and Enphase's distinction is in its focus on the microinverter -- which is attached to each panel -- as opposed to the central string inverter, which has been the industry norm and functions as an overall solar system voltage control. Whereas the failure of a central string inverter can take down an entire system, the microinverter can increase overall system reliability by its per-panel approach.

The Enphase story has been entirely linked to North America, and predominantly growth in U.S. solar.

Undeniable in the case of Enphase Energy is the top-line growth, even as it remains a pre-earnings company. Revenue has risen from $20 million in 2009 to just under $150 million in 2011, though cost of revenue has risen at almost the same pace, reaching $120 million last year.

The key issue for Enphase is about whether this top-line growth is sustainable. Here are a few key issues to consider:

Much of the recent growth in the U.S. market, in particular in 2011, was stimulated by the section 1603 cash grant program, which served as a ballast under the small-scale solar project market, and which expired at the end of last year. There is an effort underway to get Congress to revive the cash grant, however, it is all but a legislative certainty. It's impossible to know how much of Enphase's recent growth came courtesy of the big push in 2011 to deploy solar before the cash grant expired, but it's a factor in the company's recent rise that can't be ignored. Is it just a matter of lucky timing for the top line?

"Industry wide we saw a surge in demand in the U.S. as 1603 wrapped up and I think maybe there will be an air pocket after 1603 but given what's happened to module pricing and state incentives, solar should still be profitable in the U.S. The concern would be a temporary pause," Pacific Crest's Schuman said.
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