Based in Fremont, California, Enphase Energy Inc. (ENPH, Financial) designs software-driven residential and commercial solutions for solar energy generation, home energy storage and web-based system monitoring and control.
The company’s globally diversified supply chain has helped it gain an edge in recent years amidst supply chain turmoil, and its technology leadership has helped turbocharge growth. According to Clean Energy Reviews, Enphase manufactures the best microinverter on the market due to its low failure rate and high quality, combined with advanced system monitoring and a superior customer service track record.
Over the past three years, Enphase has grown its revenue per share at a stellar clip of 50.4% annually, while its earnings per share have climbed a yearly average of 31.1%.
The combination of rapid growth and technology leadership spurred Enphase’s stock to an all-time high of $339.92 in December of 2022. The stock was undeniably overpriced at that point with a price-earnings ratio of more than 150. However, since then, the stock has fallen about 38%, even as its earnings have improved.
Now that this solar growth star has gone on sale, let’s take a look at whether it is truly a bargain, or whether it still has room left to fall.
Enphase’s advantages
Enphase’s biggest advantage is rooted in technology. The company revolutionized solar power in 2006 when it introduced the first advanced microinverter technology, partnering with solar module manufacturers to integrate Enphase IQ microinverters into the solar panel manufacturing process.
As of its February 2023 investor presentation, the company had shipped 58 million microinverters representing 19 gigawatts of capacity. Its installer network consisted of over 1,300 installers, and it had more than 3 million managed systems (both residential and commercial) in 145 countries around the world. It has also further diversified revenue with energy storage systems and more.
Enphase’s highly profitable technology partner business model serves as another competitive advantage, as the company does not have to bear the same costs and risks as installers or manufacturers. The cost of goods sold amounted to just 58% of revenue in fiscal 2022, which is incredible for a company in the solar industry.
The company’s astute management of its manufacturing partnerships has also been a source of strength. For example, in 2020, Enphase worked with one of its manufacturing partners, Singaporean-American multinational manufacturing giant Flex Ltd (FLEX, Financial), to move its production for the U.S. market from China to Mexico. Not only did this sidestep tariffs from the U.S.-China trade war, it also improved Enphase’s market position in Mexico, which is a much less competitive space for solar providers than China.
Can the growth continue?
Most estimates see future growth rates for the microinverter market to be quite high, since microinverters enable things like module-level monitoring, design flexibility and easier installation. For example, Mordor Intelligence predicts the microinverter market will grow at a compound annual growth rate (CAGR) of 19.6% through 2028, while ReportLinker estimates a growth rate of 17.8% over the same time frame.
These are solid growth rates, but it appears the growth of the microinverter market alone will not be enough to keep Enphase’s growth at the same pace as historical levels. The company will need to not only grow its market share but also continue diversifying its offerings.
Thankfully for investors, Enphase has not slacked off on expanding its product lineup, despite keeping research and development costs to a manageable level at just 7% of 2022 revenue. Its IQ8 microinverter is the world’s first grid-forming microinverter, it continues making advancements in its battery technology and it has created the Enphase Energy System, an energy storage and monitoring ecosystem for residential customers. It is even expanding into portable energy systems and electric vehicle chargers and continues to search for value-additive acquisitions.
Valuation
When we take earnings estimates from Mornignstar (MORN, Financial) analysts into consideration, Enphase stock now trades at a forward price-earnings ratio of 36.24, which is not bad if it can keep up the growth. Analyst estimates peg the company’s future three-to-five-year earnings per share growth rate at 32.73%.
The GF Value chart rates the stock as significantly undervalued based on a combination of historical returns, past multiples and analysts’ estimates of future business performance.
Enphase’s return on invested capital (ROIC) is higher than its weighted average cost of capital (WACC), meaning it is creating value for shareholders. This is partially countered by the three-year share buyback ratio of -3.5%, which shows net share issuance, though this is to be expected in a company pursuing a growth and acquisition strategy.
Takeaway
Enphase stock has gone on sale recently, at least compared to its previous overvaluation. Whether it is truly undervalued on an absolute basis depends on whether it can keep up the earnings growth, but its prospects look good when we consider its technology leadership, supply chain strength, solid profitability and geographical diversification.
