January 8, 2020
What a year! 2019 proved a notable one filled with many significant events and successes. On
a personal level, my family was fortunate to celebrate 2 engagements as well as 2 milestone
birthdays. I turned 65 (Medicare’s not so bad!), Caryl turned 60 (kicking and screaming). To
top it off, our future son-in-law graduated from medical school and earned his desired
residency. From the GCM perspective, it was a momentous year as well. After a rejuvenating
family vacation, I’m ready to focus.
Your year-end statements will reflect that we had a spectacular year. Led by our two largest
equity holdings–Enphase (+452% in 2019) and Intellicheck (+250% in 2019)—it was record
setting. Furthermore, we are up over 1,000% from our original Enphase purchases. We handily
exceeded the market as well as our expectations, yet we did it without the inherent market risk.
On a risk-adjusted basis, our performance was special. Risk-adjusted refers to the fact that
accounts are not 100% invested in common stock, like the S&P500. We have cash (money
market) and most clients own Vanguard bond funds and Gladstone Land (land REIT-real estate
investment trust). Owning these types of investments lowers our correlation with the stock
market and often, the risk associated with being 100% invested in equities.
One more thing about 2019 – DON’T BE SPOILED BY THIS YEAR’S PERFORMANCE!
Enphase had a great year, and it just keeps getting better. The world's leading supplier of solar
microinverters turned in a solid operating performance for the first three quarters of 2019 —
Revenue is soaring, profits are rolling in, and the company is generating a healthy amount of
The company’s turnaround has been swift. Not that long ago, when I first visited the company,
the business was wallowing in operating losses and weighed down by a troubled balance sheet.
But management has drastically improved the technology and, combined with the growth of
solar energy installations around the globe, has proven to be a powerful combination. Where
will Enphase Energy be in five years?
Recently, I attended the Enphase Analyst Day at their headquarters in Freemont, CA, where I
had the opportunity to mingle with management and board members. The energy at this
meeting was palpable. Compared to my first Analyst Day (June 2017), the energy in the room
could have lit the city. I’ve not witness anything like it in the forty-five years that I’ve been
exploring investments. I came away confident that we are STILL in the early innings. (It’s hard
to believe I can say this about a 10 bagger.) My positive view on Enphase going forward is
based on the following factors:
Generating positive cash flow
At the end of 2017, ENPH had a negative -$33mm cash flow and +$29mm cash available. At
the end of 2019, they will have +$80mm and +$250mm respectively. WOW!
Products gaining market share
There microinverters are winning acclaim throughout the industry vs. the traditional string
inverters (think XMAS lights – when one fails…) and their market share gains in 2019 and
going forward into 2020, are evident. Furthermore, the new production facility in Mexico (to
compliment China’s production) will allow Enphase to eventually double production, avoid
tariffs, and lower shipping expenses in North America.
Significant growth in the residential and commercial solar industry
Due to sizeable price declines throughout the past 10 years, fires and grid outages, drastically
improved technology (both hardware and software), greater carbon awareness, etc…, the solar
available market (SAM) will be improving exponentially over the next decade.
Reliability, customer service, product innovations/introductions
Enphase inverters are proving to be extremely reliable (industry low failure rate with a 25-year
warranty) and their customer service rated exceptional by industry installers. Two CEOs from
large installer companies in the U.S. spoke to us and shared why Enphase is the ONLY solution
that makes sense to their companies for residential installations. There are too many technical
advances to mention but consider the potential for this new product ingenuity: third world
communities without access to a grid, where pumping water out of the ground or lighting a bulb
at night is difficult. What if they had a box tied to a solar panel that could pump water for the
community, power a new portable, inexpensive air conditioner and keep a community safe by
providing lights during the evening? Might this be a game changer?
This is the holy grail – solar power with the ability to store unused energy collected during the
day. It is most likely that inverters will be the home energy hub. Since inverters will control
both generation and storage, they will essentially act as a traffic cop to direct power flows
among appliances depending on electric rates, grid conditions (or lack thereof), and appliance
energy needs/surpluses. Software, communications and cybersecurity will be among the most
important components of solar-plus-storage systems. Inverter and battery technology will not be
usable by installers and customers without a complete suite of secure and easy-to-use software.
This is what Enphase brings to the table – a complete suite that seamlessly communicates with
all aspects of a household’s energy needs. The solar-plus-storage industry is destined to be a
key part of virtually every building in the U.S.
With first shipments of Enphase’s Ensemble (home energy management system) expected in
this quarter, we expect 2020 to be an initial inflection point in this new revenue opportunity.
The battery opportunity appears to be significant, and I believe today’s current valuation is
based on inverters alone, not to include storage or new product introductions. The available
market for solar and storage could quadruple Enphase’s available market in 2022.
How do we cope when the wind doesn’t blow and the sun doesn’t shine? Storing renewable
energy with lithium-ion batteries will play an essential role in solving this issue. Adding storage
effectively ‘firms up’ the supply of electricity and gives it the reliability characteristics of fossil
From a growth perspective, we haven’t seen anything yet!
New business model 35-15-20
In 2017, Enphase’s new CEO (Badri), promised that they would achieve 30% gross margin,
20% operating expense, and 10% operating income within the next two years. They did! At
this Analyst Day, they announced they will achieve 35% gross margin, 15% operating expense,
and 20% operating income. So, what’s the takeaway? –a doubling of operating income on
much higher sales. Sustainable profit, strong cash flow generation and an iron-clad balance
sheet is mandated by the management team. I believe they will achieve this because they’ve
accomplished everything and more with the promises made in the past 2 ½ years.
Why is growth taking off now?
The key reason is cost: battery pack costs have fallen from more than $1,000/kWh (kilowatt
hour) in 2010 to less than $200/kWh today.
Solar-only installations will become the exception rather than the rule. Unreliable utility
power, lower battery costs, grid-services capabilities and energy management features will
drive customers toward selecting more full-service solar and storage offerings. Battery
systems will be designed and branded by the inverter company. The integration between the
battery and inverter is specific in order to maintain warranty integrity, performance and
installation ease. Contractors want one point of contact for the entire solar and storage
system. We believe that Enphase has the desired SOLUTION!
Intellicheck – IDN
Intellicheck, our other top performer and GCM’s second largest holding had a breakout year
Intellicheck, (IDN) is a technology company that provides identity authentication systems. The
company’s patented technology authenticates an individual’s identity by verifying the barcodes,
magnetic stripes and other codes in government issued IDs from the U.S. and Canada/Mexico.
IDN’s primary focus is to eliminate identity theft in the financial services and retail
markets which we believe is the fastest path to revenue growth and profitability. In 2018,
14.4 MM adult Americans had their identities stolen with losses totaling $14.7bill. Q1 2019 had
a 56% increase in data breaches over Q1 2018. A 126% increase in breaches year after year
exposed 446mm records. Typically, a criminal just needs an ID in order to access the data for
IDN’s Simple Solution
-The fastest and most accurate first step is to authenticate an individual’s government issued ID,
such as a driver’s license.
-No new hardware is required by retailers. IDN software uses existing point of sale (POS)
platforms, a mobile device or online authentication, taking less than 3 seconds.
-Fraud is nearly eliminated while speeding up the acquisition of good customers. Scan to Credit
is less than 30 seconds for an average client, while reducing fraud by more than 99%.
IDN is sold into financial and retail channels to reduce credit card fraud. The opportunity in this
market is derived from consumers using fraudulent drivers’ licenses to purchase (or return)
goods via credit/debit cards. Visual inspection of driver’s licenses to validate a credit card
leaves retailers subject to fraudulent activities. Counterfeit drivers’ licenses can also be used to
return stolen merchandise. IDN offers a unique alternative to fraud prevention through patented
technology (Retail ID) that authenticates a driver’s license by scanning its barcode, either in
stores or online. For account lookup, this allows retailers to look up your credit card account by
scanning your driver’s license in order to authenticate the person wishing to view or access their
account. Finally, these retailers can now accept non-receipted returns by scanning your driver’s
license to authenticate the purchase of the item you are looking to return. IDN has been
ramping with several banks/retailers (possibly Citibank, Capital One) and the feedback has been
very positive, thus far.
HAPPY NEW YEAR, AND WELCOME TO THE ROARING 20’S!
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.