Where Will Enphase Energy Be in 5 Years?

Enphase Energy (ENPH +1.51%) has had a great year, and it just keeps getting better. The world's leading supplier of solar microinverters turned in a solid operating performance for the first half of 2019 -- revenue is soaring, profits are rolling in, and it's generating a healthy amount of cash. 

The company's turnaround has been swift. Not that long ago, the business was wallowing in operating losses and weighed down by a troubled balance sheet. But technology upgrades and the growth of solar energy installations have proven to be a powerful combination. As investors pore over the company's latest operating results, they may wonder: Where will Enphase Energy be in five years? Let's consider what could be in store for this business.

Image source: Getty Images.

By the numbers

Enphase Energy has considerable momentum heading into the second half of 2019. In the first half, its latest-generation IQ 7 products comprised 98% of all shipments, up from just 22% in the year-ago period. These more powerful microinverters are driving a nearly insatiable demand for the company's products. While that has led to component shortages recently, management announced the start up of a new manufacturing facility in Mexico to simplify its supply chain and avoid tariffs.  

That should give investors confidence that Enphase Energy can maintain its current promising trajectory in the near term.  

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

As the chart above shows, the business delivered impressive year-over-year growth on every important metric in H1 2019. In fact, the business appears to have exceeded its previous long-term targets, which it described as "30-20-10" -- 30% gross profit, 20% operating expenses, and 10% operating income (all on a non-GAAP basis).

In Q2, Enphase achieved 34-17-17. CEO Badri Kothandaraman told investors on the quarterly earnings conference call he was well aware of the overshoot, but said "we would like a few more quarters of solid execution under our belt" before management starts setting even more ambitious targets. (Perhaps the next iteration will use GAAP metrics instead.)

One factor driving the impressive performance that doesn't show up directly on the income statement is the Enphase Upgrade Program, which allows early adopters of its products to swap in the latest hardware. In Q2, the program reported a 65% acceptance rate among over 5,000 homeowners -- and happy customers can do a great deal to support growth. 

Image source: Getty Images.

What's ahead between now and 2024?

Two forces will drive the story for Enphase Energy in the near term: technological improvements and the growth of the solar energy sector. Natural, it has much more control over the former. For example, the company's IQ 7 microinverter has gone from launch to absolute domination of products shipped in a little over one year. That has a lot to do with the recent surge in revenue and profits. 

As technology advances, Enphase Energy can pack more computing power into the same footprint. That enables scientists to scale-down the microinverters and reduce the complexity of the overall hardware by reducing the number of components. For instance, the IQ 7 features 3.8 million logic gates, but the next-generation IQ 8 microinverter (now in development) wields 5 million. That 31% increase in computing power can make rooftop solar more valuable and efficient, while also opening the possibility of their use in off-grid applications that aren't feasible today.

The pace solar energy's rise, and the macroeconomic factors that surround it, are beyond any company to steer, although it seems that solar is destined to gain momentum for the foreseeable future. The technology ecosystem is more robust than ever, costs continue to fall, and state mandates are providing a helpful tailwind. As The Motley Fool contributor Travis Hoium noted in May, the United States now has 2 million separate installations of solar panels. It took 40 years to reach that milestone, but the next 2 million may only take four years. An estimated 96% of current setups are on residential and commercial rooftops, which is exactly the market targeted by Enphase Energy.

According to the U.S. Energy Information Administration, non-hydro renewable energy sources (primarily wind and solar) provided 10% of the country's electricity in 2018. That should rise to at least 13% by 2020. Meanwhile, NextEra Energy projects the average cost of electricity produced from solar plus storage will be identical to that generated from natural gas by the end of 2023. If that inflection point is reached, then solar's growth trajectory could turn nearly vertical within the next decade. 

Well-positioned for success

The only thing investors might complain about is that the stock is trading at a premium relative to the Enphase Energy's performance, but Wall Street cares a lot more about where this company is headed than where it's been. Couple its growing operating momentum with the powerful trends that will support it, and this solar hardware business is well-positioned for short- and long-term success.