What happened

Shares of Enphase Energy (NASDAQ:ENPH) rose as much as 33.6% today after the company reported impressive second-quarter 2019 operating results. The risks of tariffs and component shortages have been steamrolled by the company's momentum. In fact, the microinverter supplier managed to address both risks by working with one of its manufacturing partners, Flex, to start up a new facility in Mexico. The operation will make it easier for Enphase to meet customer demands in the United States while avoiding tariffs, and it will also be able to step in to fill the gaps for international customers. 

But that important development turned out to be a footnote in the Q2 report. Enphase Energy delivered year-over-year growth on every important financial metric and even blew past its own long-term 30-20-10 goal, which targets 30% gross margin, 20% operating expenses, and 10% operating margin on a non-GAAP (generally accepted accounting principles) basis. The business achieved 34-17-17 in the most recent quarter.

As of 12:34 p.m. EDT, the stock had settled to a 30.9% gain.

A man standing on a column holding a cutout of an arrow pointing straight up.

Image source: Getty Images.

So what

Enphase Energy reported that IQ 7 microinverters reached 98% of all shipments in Q2, up from just 22% in the year-ago period. The current-generation hardware is in high demand. More than 500 solar installation companies in the United States are incorporating the Enphase Energized AC Modules to reduce solar design complexity. The latest operating results reflect that insatiable appetite: 

Metric

First Half 2019

First Half 2018

Change (YoY)

Revenue

$234 million

$146 million

60%

Gross profit

$78.6 million

$41.0 million

92%

Gross margin

33.5%

28.1%

546 basis points

Operating expenses

$54.1 million

$44.0 million

23%

Operating income

$24.6 million

($3.0 million)

N/A

Operating margin

10.5%

(2.1%)

1,260 basis points

Net income

$13.4 million

($8.9 million)

N/A

Cash flow from operations

$31.8 million

$7.4 million

327%

Data source: SEC filing. YoY = year over year.

Management expects the business to perform even better in the third quarter of 2019. It projects revenue will settle in the neighborhood of $175 million at the midpoint (more than first-half 2018 revenue) and expects a gross margin of 34.5% at the midpoint. Operating expenses are expected to rise to around $29.5 million to make the most of growth opportunities, but that would still leave plenty of room for operating income to keep trekking higher.

Now what

There's no stopping Enphase Energy right now. The company's biggest problem is scaling quickly enough to meet customer demand, which is a great problem for a profitable business to have. That said, investors and shareholders might scoff at the soaring premium shares are trading at. While the stock could give up some of its gains in response to a frothy valuation, there aren't many places in the stock market to find profitable growth on the order of magnitude being delivered by the business. That suggests Enphase Energy will at least grow into its current premium, perhaps sooner than expected.