Enphase Energy: Buy at the High?

Shares of Enphase Energy (ENPH -5.56%) have nearly quadrupled through the first six months of 2019. On one hand, the business has earned a higher valuation by cementing profitable operations and positioning itself for rapid growth in the near future. On the other hand, a six-month return of nearly 300% sure raises some eyebrows when visualized with a chart.

The solar hardware provider is clearly doing some things right, but investors might be wondering if Wall Street has priced a little too much future growth into shares at the moment. If so, then starting or adding to a position could leave investors regretting their money moves. Is Enphase Energy stock a buy at an all-time high?

Image source: Getty Images.

Is this solar stock too expensive?

The business is on a promising trajectory. After spending years struggling with debt and wallowing in operating losses, Enphase Energy finally put the pieces together in 2018. Customers rapidly adopted its next-generation IQ 7 microinverters, which are the core piece of hardware that allow power optimizers to smooth out electricity production from solar modules. It even inked a deal to become the exclusive microinverter provider for SunPower modules.

All of that momentum delivered a full-year 2018 operating profit of $1.6 million, which isn't much, and was entirely driven by a $5 million profit in the fourth quarter, but it compares favorably with an operating loss of $39.3 million the year before. It was also just the beginning.

Enphase Energy reported operating income of $7.1 million in Q1 2019 and expects that to continue rising for the foreseeable future. The business also reported a revenue increase of 43%, an 82% surge in gross profit, and a 710-basis-point expansion of gross margin compared with the prior-year period. That helped to drive operating cash flow 407% higher year over year to over $17 million.

Despite the swift progress in the company's financial profile, shares do appear to be a bit expensive relative to where the business is right now. Consider how Enphase Energy compares to SolarEdge Technologies (SEDG 1.92%), which sells a diverse portfolio of solar hardware and clean energy products. 

Data source: Yahoo! Finance.

Of course, investing is often about where a company's going, not where it's been. Enphase Energy is on pace to deliver roughly $500 million in revenue in 2019 and achieve a nearly 10% operating margin by year's end. That should put the company in a position to comfortably make the necessary capital investments in its next-generation IQ7 X and IQ8 microinverters as well as its revamped lineup of energy storage products.

Moreover, the business appears poised to ride the momentum of accelerating solar power installations. According to the U.S. Energy Information Administration, the United States generated 12% more electricity from solar power in Q1 2019 compared to the year-ago period, and 55% more than the same period of 2017. 

Perhaps that helps to explain why Wall Street isn't fretting over the fact that Enphase Energy is worth just $14 million on paper. While that's not ideal, the tally of shareholders' equity nearly doubled in the first three months of 2019 compared with the end of 2018. So perhaps continued strong cash flow generation can help to bolster the balance sheet over time. Nonetheless, this is something investors want to watch closely in the coming quarters and years. 

Image source: Getty Images.

This one might be priced for perfection right now

There's no denying shares of Enphase Energy are expensive using traditional valuation metrics. While the business is growing hand over fist and expects that to continue, the stock might be priced for perfection right now. Put another way, there's no wiggle room to account for possible risks on the horizon.

What if the company's suppliers continue to encounter component shortages and drag down revenue growth? What if the launch of IQ8 microinverters are delayed again and that pushes back the debut of the company's energy storage products? What if an economic slowdown weighs on the appetite for investments in new solar projects?

I was bullish on Enphase Energy last November, and I still think it has a bright long-term future, but investors might want to wait for a pull back in the stock price before starting or adding to a position. Barring an acquisition, the business is going to have to deliver a lot of growth and avoid obstacles to be worth its current $2.1 billion market valuation.