Energy prices are going through the roof, households all over Europe are unable to pay their energy bills and companies need to shut down factories all over Europe. Extreme. These prices are mainly driven by the oil and gas prices, which are elevated because of the Russia-Ukraine war.
There is one positive because of these high prices and this is the extra push towards green and sustainable energy. This push is visible in the EU and US by the government stimulus for green energy. The EU came with the "REPowerEU" plan and as of the 16th of august this year the Inflation Reduction act is effective in the US. Both are pumping huge amounts of cash into the development of more green energy.
One of the companies profiting from this is Enphase Energy (NASDAQ:ENPH ). I am more of a value investor, but sometimes there are just these opportunities I don't want to miss out on. Enphase is one of the best green energy picks in the market. Yes, they are also very highly valued ever since their last earnings call, so you must be careful about stepping in. But this is one of those companies where a high valuation is fully justified. The growth rate, dominant product, massive growth of the industry, and excellent management are reasons to still invest in Enphase even at these prices.
Enphase Energy is an American-based energy technology company with its headquarters in Fremont, California. Enphase Energy currently has 2549 employees and 6423 installers worldwide. The company mainly produces microinverters, but they also produce battery energy storage and EV charging stations. Enphase was established in 2006 and is the first company to successfully commercialize the solar microinverter. A microinverter converts the direct current power generated by a solar panel into grid-compatible alternating current for use or export. So why would consumers pay extra for a microinverter over a built-in central inverter in their solar system? Well, if a solar panel with a central inverter built in fails, solar production stops completely. With just one microinverter per solar module, solar production keeps working even if a microinverter stops working. The picture below shows this system.
How do microinverters work (Enphase Energy)
How do microinverters work (Enphase Energy)
Important for any company is its strategy. In their investor presentation, Enphase states the next:
Build best-in-class home energy systems and deliver them to homeowners through our installer and distribution partners, enabled by a comprehensive installer platform.
The main products of Enphase are its microinverters. Its newest Microinverter is the IQ8. This is the model they ship right now to 37% of customers. In 2Q22 Enphase confirmed they have shipped 42 million microinverters worldwide deployed across nearly 2 million solar projects. During their latest earnings call Enphase had this to say about the IQ8:
The grid forming IQ8 Microinverters can provide Sunlight Backup™ during an outage, even without a battery. And, with the Sunlight Jump Start™ feature, IQ8 Microinverters can restart a home energy system using sunlight only after prolonged grid outages that may result in a fully depleted battery.
Other products are the IQ Battery, IQ portable energy system, and EV Charger. All these products can be connected to the IQ load controller which enables the consumer to get control over the entire system within one app. The possibility to control your whole system through one single app is a huge selling point for Enphase.
Let's start with the historical performance of Enphase energy. In 2Q17 (5 years ago) Enphase reported $74.7 million in revenue for the quarter. GAAP gross margin for the second quarter of 2017 was 18.1% and non-GAAP gross margin was 18.4%. GAAP net loss for the second quarter of 2017 was $12.1 million, or a net loss of $0.14 per share. During this quarter the company reported solid revenue growth of 36% compared to the first quarter of that year.
Now let's compare this to the most recent quarterly results. Quarterly revenue was $530.2 million along with 42.2% for non-GAAP gross margin. GAAP net income was $77.0 million and GAAP diluted earnings per share was $0.54. Finally, free cash flow was $192 million. This was a record quarter for Enphase. Enphase saw no slowdown at all, despite all the economic turmoil currently going on. It even saw an increase in growth supported by explosive growth in Europe. The extremely high energy prices are a tailwind for all green energy initiatives, and Enphase plays a very important role in this shift towards solar energy. Enphase grew its revenue by 20% QoQ; 63.57% YOY.
According to Enphase, quarterly revenue was driven by strong demand for Enphase Energy Systems, powered by IQ Microinverters and IQ Batteries. IQ8 Microinverters constituted 37% of all the microinverter shipments during 2Q22. Revenue for Europe increased a whopping 69% compared to 1Q22, led by strong growth in The Netherlands and Germany.
Enphase remained committed to expanding the business besides growing the existing parts. During the earnings call, management said the following:
Our strategy is to build best-in-class home energy systems and deliver them to homeowners through our installer and distribution partners, enabled by an installer platform. We have completed five acquisitions in the last six quarters, one for EV chargers and four to help create our installer platform. We shipped more than 8,250 ClipperCreek EV chargers to U.S. customers in the second quarter of 2022 and expect healthy growth going forward. We are working to move production to our manufacturing partner in Mexico, making our chargers smart and integrating the EV chargers into our home energy management systems. We recently acquired SolarLeadFactory LLC to provide high-quality leads to our installers and further strengthen our installer platform. In January 2021, we acquired Sofdesk Inc. to provide solar design software capability and approximately 950 installers are using the Solargraf software. We acquired a business in Noida, India in March 2021 to provide proposal and permitting services for installers and are focused on automating these services. In December 2021, we acquired 365 Pronto, Inc. to simplify maintenance for installers by matching cleantech asset owners to a local and on-demand workforce of service providers. All four acquisitions aim to make life simpler for installers by providing them high-quality products and services, ultimately reducing their soft costs.
The fun didn't end here though. The third quarter outlook might have been even more impressive under current macroeconomic conditions. They expect revenue to be within the range of $590 million to $630 million, and GAAP gross margin to be within a range of 38% to 41%. This would represent 79% YOY growth and $187.6 million in operating profits.
So, to compare its business growth over the last 5 years:
Above we discussed the amazing results of Enphase in 2Q22 and the incredible growth of the stock since 2017 (over the last 5 years). But did the stock price represent this growth over the 5-year period and the last year? Let's start with the performance over the last year.
Enphase performance YTD (Yahoo Finance)
Enphase performance YTD (Yahoo Finance)
The graph above actually shows us that Enphase managed to return 87% over the last year and so almost doubling while the S&P 500 fell by 17.71% over the same period. This is a massive outperformance supported by its secular tailwinds, amazing growth, and high valuation.
Enphase performance over last 5 years (Yahoo Finance)
Enphase performance over last 5 years (Yahoo Finance)
For those who bought Enphase 5 years ago and did not sell up until today, this was a golden buy and they are looking at astronomical returns of more than 18,000%. However, this massive growth way outperforms the actual business growth and this gives us a big valuation problem.
Enphase exited the second quarter of 2022 with $1.25 billion in cash and cash equivalents and generated $200.7 million in cash flow from operations in 2Q22. The total debt for Enphase is $1.31 billion with no short-term debt.
The biggest problem with Enphase stock is its valuation. We could already see, in the previous sections, that the stock price way outperformed company growth and this resulted in elevated valuation numbers. Right now, Enphase is valued at a forward P/E ratio of 68.24 and P/S of 16.73. This results in a seeking alpha quant rating of F.
Enphase is extremely highly valued on these metrics, and this results in significant downside risks, because of value contraction. Enphase is valued for perfect growth. The company does receive an A+ from Seeking Alpha Quant for its growth. As mentioned before, the company's growth is solid and well supported, but there is no room for mistakes.
Profitability wise the company is also very strong, as the numbers from 2Q22 show us. The company is very profitable by all metrics, and this is a very good thing. Enphase receives an A- from Seeking Alpha Quant, because of its excellent margin and ROE. Such strong margins are rare in the solar market.
The company has a great and healthy balance sheet, supported by good cash reserves and free cash flow generation.
In the intro of this article, I already mentioned the extreme energy prices all over the world (mostly in Europe) and the huge support of governments toward green energy. This creates a lot of opportunities for Enphase. The REPowerEU and Inflation Reduction Act are two huge boosters for Enphase energy. Let us start with The Inflation Reduction act:
The inflation reduction act (IRA) is a United States law which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing into domestic energy production while promoting clean energy.
This bill is giving a $369 billion boost to energy security and climate change. The goal is to reduce emission with 40% by 2030. It gives businesses tax deductions for energy-efficient commercial buildings. It extends tax credits through 2024 for producing electricity from renewable resources such as wind and for investment in energy properties such as solar.
This bill is supposed to be a huge boost for the solar and wind energy business. Wind and solar energy should grow from 13% of energy generation today, to 60% in 2030. Enphase is in the perfect position to profit from this law as they are an important player in durable solar systems.
The REPowerEU is a new plan to reduce the dependence on Russian fossil fuels. This is still a plan, so less concrete than the Inflation Reduction Act. This is what the EU has to say about it:
A massive scaling-up and speeding-up of renewable energy in power generation, industry, buildings and transport will accelerate our independence, give a boost to the green transition, and reduce prices over time. The Commission proposes to increase the headline 2030 target for renewables from 40% to 45% under the Fit for 55 package.
To achieve this, there is a dedicated EU Solar Strategy to double solar photovoltaic capacity by 2025 and install 600GW by 2030. I don't think I need to explain how this is good for Enphase energy right? To achieve these goals by 2030, the EU wants to invest an additional $210 billion between now and 2027.
Other opportunities for Enphase are the strong position of the company in the market. The company has a clear competitive advantage through its dominant products. The IQ8 microinverter is the best solar microinverter in the market today, because of its large number of features. A seeking alpha news article recently reported that Dutch energy company Gaslicht.com reported that 75% of Gaslicht.com's customers have chosen Enphase microinverters for their solar systems. This shows us the dominance of Enphase within the microinverter business, also in Europe. The huge share of microinverters in solar systems provides Enphase with the opportunity to upsell these customers to also using their IQ battery and EV chargers. The ability to then control everything through one app on your phone is a huge selling point. The more products Enphase launches, which are competitive in the sector, the more cross-sell opportunities appear. Enphase can leverage its strong penetration through its microinverters to cross-sell more products.
There are a lot of opportunities for this company, but what are the main threats? Well, as stated before, I don't see a massive slowdown in business growth for Enphase. The company has a solid outlook and a lot of tailwinds for the years to come. Though, a recession and less consumer spending may be a problem. Consumers may want to wait with spending a lot of money on a new solar system for their house and the same might go for businesses. The big push against this theory is the lots of government support for these green initiatives, like subsidies. The very high energy prices may also still give a boost to solar spending. People and businesses don't want to rely on gas prices to warm their houses and offices anymore. An investment in solar panels now, to not be reliant on gas prices, while receiving subsidies for doing so, might sound like a very good plan to many. Still, there might be a small headwind on earnings growth because of a recession and less consumer spending. I do think Enphase will remain its high growth rate through all microenvironments, because of its many tailwinds and strong market position.
Are there no threats at all? Yes, there is one big one and that is valuation. As I said earlier in this article Enphase is very highly valued. Right now, Enphase is valued at a forward P/E ratio of 68.24 and P/S of 16.73. This valuation alone will be a reason for a lot of investors to stay out of the stock. This valuation does give it a lot of room for downside. I think most projected growth is priced in already, but I also believe Enphase can way outperform expectations over the next few years and so I think current valuations do not have to be a reason to stay away from the stock. A fact is that the company has a very high valuation and that makes it a risky and volatile investment. I do think that if u manage to see through its valuation and can cope with the high volatility and high risk of the stock, u could see very good returns in the years to come.
I think the dominant position of the company within the solar market, by using its microinverters to penetrate businesses and households and then cross-sell into more products like EV chargers and its IQ batteries, gives the company a very strong business position in an extremely fast-growing sector. According to Allied Market Research, the solar industry market was worth $52.5 billion in 2018. The market is expected to grow to $223.3 billion by 2026 at a 20.5% CAGR. This growth is supported by a lot of government funding for solar energy and very high energy prices. The threat of Europe running out of gas during a very cold winter is terrifying to many. Governments, businesses, and consumers don't want to be dependent on the oil and gas supply and so, start looking for other possibilities. Solar might be the best offer and all of this gives a huge boost to Enphase energy. I expect the company to keep growing at a very fast pace and outperform consensus forecast, and even their own expectations, just like they have been doing over the last few quarters. The stock is a very high-risk, high volatile stock, but worth the risk to me. It is up to you to consider the risk you want to take.
For now, I still give Enphase a buy rating. The recent drop made it a little more attractive, though still expensive. Were the company to experience a slowdown over the next few quarters, then the valuation would have to go down. A slowdown or earnings miss would therefore make it a hold.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of ENPH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.