The world's leading supplier of microinverters reported solid fourth-quarter and full-year 2018 operating results Wednesday. Enphase Energy (NASDAQ:ENPH) revealed it had grown revenue 10% on the year compared to 2017, and it reached an important milestone by achieving positive quarterly operating income. In fact, its Q4 operating income was high enough to cancel out its operating losses from the first three quarters, meaning operations were (barely) profitable last year.
Those results pushed the stock price up to levels last seen in 2015. While investors are now paying a premium for growth, Enphase Energy management is confident the business can continue exploiting opportunities in the fast-growing global solar industry. Here are three takeaways from its historic Q4 report, including where the business is heading in the near future.
1. Growth is outpacing supply for some components.
In Q4, Enphase Energy wrestled with shortages for certain components needed to manufacture high-voltage transistors, which weighed on revenue a little. It also lengthened the lead time for shipments to customers to as long as 15 weeks, and even forced the company to fly in some components, increasing operating expenses slightly. While the business has invested in projects with suppliers to ease bottlenecks, new capacity won't come online until the second half of 2019. But once it does, lead times should fall to as little as six weeks.
So long as those supply constraints are addressed in a timely manner and don't have a significant impact on revenue, investors might view that shortage-inducing growth as encouraging. Enphase Energy's revenue grew to $92.3 million in the quarter, a 16% year-over-year increase, and to $316.1 million for the year. Management expects Q1 2019 revenue to be in the neighborhood of $92.5 million, which would amount to growth of 32% year over year.
2. The business is finally delivering operating profits.
Operating income might be the single most important metric for individual investors to follow for any business. It demonstrates that a company has successfully and profitably commercialized a product and is creating value not just for customers, but for shareholders, too. By that measure, Q4 2018 will be remembered as a turning point for Enphase Energy -- the period during which it finally achieved profitable operations.
The business reported Q4 operating income of $5 million, which was enough to lift its full year operating income to $1.6 million. That compares quite favorably to its operating loss of $39.3 million in 2017, but it's still far from management's long-term goals.
Enphase Energy is striving to achieve an operating margin of at least 10%. In the final three months of 2018, it achieved an operating margin of just over 5%. In other words, despite a historic quarter, the solar hardware supplier is only halfway to its profitability goal -- which should be an encouraging sign for shareholders.
3. Its next-generation product will be slightly delayed.
Wall Street was giddy enough about the progress on revenue and operating income to cut the company some slack regarding the less glamorous admissions management made on its Q4 2018 earnings conference call. Enphase Energy's next-generation Ensemble solar-plus-storage system hit some development snags, and is now expected to launch in Q4 2019. The nearly six-month delay was caused by the complexity of the system, and management's decision to prioritize "making the right decisions for the long term and getting the customer experience right."
It's certainly refreshing to hear a management team talk about focusing on the long term. And the postponement shouldn't have too large of an impact on 2019 operations, as the Ensemble system wasn't expected to make a major contribution to the business this year. What's more, the residential solar-plus-storage market is still in its infancy -- one could even describe it accurately as being in its embryonic form -- which means the next-generation product portfolio's launch is really about laying the foundation for growth in the early 2020s.
That said, investors will need to keep an eye on the Ensemble system's path to market. Enphase Energy may be doing just fine without it now, but it does represent the company's future. For example, it serves as an important testing bed for its next-generation IQ 8 microinverters. At this point, sales of the company's IQ 7 microinverters are still ramping up, growing to 84% of all shipments in Q4. More delays or over-engineering the system (making it too complex) would be bad news for the business.
A fast-growing solar stock -- that's getting expensive
Shares of Enphase Energy have soared 93% since the beginning of the year. Judging from 2018's solid operations and the expectations for continued growth in 2019, the stock certainly deserved a higher valuation. Is the current $1 billion market cap a little too high, though?
Well, it puts shares at 32 times estimated earnings, which is a premium even in today's expensive stock market. The stock is also trading at hefty premiums to both book value and enterprise value, although its recent moves to pay off debt and its accumulation of cash from profitable operations have yet to be reflected in those metrics.
Nonetheless, investors with a long-term mindset who want to own a piece of the solar industry may not hesitate to continue adding shares of Enphase Energy to their portfolios. Just recognize that shares now are in fact expensive, and that a lower entry point could certainly open up in the future.