A mutual push towards increased use of renewable energy and lesser fossil fuels continues as concerns over global warming and climate change rise. Fossil fuels not only damage the Earth but are also not sustainable. The future will vastly depend on renewable energy as natural resources continue reaching critical levels.
The global renewable energy market is expected to reach $1.97 trillion by 2030 with a CAGR of 8.6% between 2022 and 2030. The current renewable energy is a mere 7% of the world’s energy demands. However, growing investments in solar, wind, and hydroelectric sectors, increasing cost-effectiveness in renewable energy installations, and the supply chain constraints in the larger industry are expected to grow its demand exponentially. A further driving factor at the present is the massive shortage of fossil fuels, i.e. oil and gas, rising from the Russian invasion of Ukraine, which is a growing demand for renewable energy to help with the bottleneck.
A major transformation in the energy sector will be supported by the regulations regarding clean fuel standards, biofuel production, tax incentives, and the green energy targets in the U.S. Since the introduction of the Green New Deal congressional resolution, more and more U.S. politicians have been supporting reduced fossil fuel usage. One of the major players in the wind and solar markets is Enphase Energy Inc. (ENPH).
Enphase Energy Inc. (ENPH)
Being the pioneer of micro inverter-based solar systems usage, ENPH has been the industry leader and has beaten many competitors entering the space. The company fills an important gap and needs in the sector as it is the micro-inverters that convert direct current power into alternating current, the one used in our homes. The company has been growing its revenue while continuously expanding its business and promoting shareholder value; it has also been buying back some of its stock. Its immense growth has caused the ENPH stock to soar over 15,000% in just five years.
At the present. ENPH stock is valued at a price of $168.80 per share as per the after-hours session on May 20, 2022. While being down roughly 8% year to date, the stock’s recent bullishness scored it nearly 20% in the past three months. Recently, the stock has been outperforming the market with its bulls against the wider bears amid growing geopolitical and economic instability.
While the company’s latest upbeat earnings, continued expansion, and positive future outlook support its long-term and persistent growth, the stock seems overvalued to be purchased at the present. Let’s have a further look at the stock and the company.
Expansion and Progress
ENPH has been continuously expanding its business with huge strides domestically and progress internationally. While this California-based solar energy has a sizeable market presence in the U.S., its international operations are only expected to push it to new heights.
In just a month of April and half of May, the company has expanded its micro-inverters and battery storage systems in Hawaii, Missouri, Georgia, Michigan, South Carolina, Iowa, and Nevada. Forecasts estimate the deployments in these regions to grow by two to six folds by the end of 2026.
Moreover, its strong progress in the European Union is also a reason for the latest bullish ratings. As Russia threatens to cut off fossil fuel supplies, the demand for solar/battery technology is only growing in the E.U. The company’s CEO said in the latest earnings call that it is now “tripling down on Europe in terms of spending”.
ENPH & Competitors
Being a pioneer in its sector, the company has maintained its name and outlived many newcomers. While the recent hype around renewable energy amid the declining supply of fossil fuels due to the war might have boosted its growth, it has been performing strongly even before this. The company has consistently provided better margins than others in the industry.
Complied by Motley Fool, this chart depicts the quarterly gross profit margins of the top eight solar stocks. The company’s gross margins, while being the highest over the past three years among the stocks, were 40.1% in Q1 2022 (still the highest). A top competitor of ENPH is SolarEdge, whose Q4 gross margin was around 29%.
In its latest Q1 2022 earnings, the company not only surpassed its own revenue guidance but also beat analysts’ expectations for revenue and earnings.
The company’s revenue was $441 million for the quarter, much above its forecasted $420 to $440 million. Analysts were expecting $429.91 million in revenue for the March quarter. The strong demand for its microinverters as well as battery systems drove the top line by 46.2% from the comparable $301.8 million.
Adjusted earnings also beat the analysts’ expectation, with the actual being $79 per share against the expected $0.68 a share. The non-GAAP net income totaled $109.7 million in the quarter.
Furthermore, the company’s operating cash flow and free cash flow were also solidly positive at $102.4 million and $90 million, respectively. The high positive FCF means ENPH won’t be burning through its cash balance, which was $1.1 billion (cash, cash equivalents, and marketable securities) at the end of Q1.
For the second quarter of 2022, the company expects revenue of $490-$520 million with an adjusted gross margin of 38.0-41.0%. The anticipated operating expenses for the quarter are between $70.5 million and $73.5 million, excluding certain items.
Thus, the Q2 2022 revenue guidance of the company is above the consensus estimate of $477.45 million. Analysts are expecting the full-year revenues to be $2.02 billion, while it is further expected that the company will produce $2.69 billion in revenue by the end of 2023. Additionally, ENPH is forecasted to grow its earnings at an average rate of 39%.
ENPH Ratings and Valuation
ENPH stock has a 1-year price target of $226.28 while most experts have it pegged above $200. While the price targets present a good upside from the current, its PE Ratio (TTM) is very high at 134.40. Hence, trading at a very large premium compared to the sector, the stock seems overvalued. Added to this, the guidance range of its upcoming gross margin also suggests a possible decline to 37% from the current 41% which fell by 10 basis points already.
The solar stock ENPH, owing to its strong performance so far and continued growth, has a bullish future outlook with both the stock and company up for more profits in the longer run. However, combining the high premium, overvalued stock, and a decline in gross margin, it might not be the best time to buy the stock. There still is a chance of the stock getting impacted by the wider downfall of the market due to the threat of a looming recession amid the current geopolitical and economic turmoil. If that happens, it would present a great opportunity to buy the growth stock with a better entry point.