A year ago, the stock of Enphase Energy (ENPH +3.39%), supplier of solar power system solutions, was trading for under three times sales. Now it's more than triple that. The stock has had an amazing run over the past few years. A three-year return of 3,600% might have investors wondering if it's too late to invest. Let's look at what investors like about the business, and whether there is more room for the stock to run.
Growth spurt
Enphase's performance has been driven by a huge boost in sales of its solar power microinverters (which convert DC power at the solar panel into the AC used in the home) and strongly rising margins. The transition accelerated after it completed the purchase of SunPower's (SPWR +0.00%) inverter business in August 2018.
Enphase spent much of 2019 adding capacity to keep up with demand for its latest generation of microinverter. It increased profitability along the way, and developed other offerings including its Ensemble energy management technology, which now includes the new Encharge battery storage system.
|
Metric | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 |
|---|---|---|---|---|
| Microinverter shipments | 2.113 million | 1.796 million | 1.284 million | 976,000 |
| Revenue | $210 million | $180 million | $134.1 million |
$100.2 million |
| Gross margin | 37.1% | 35.9% | 33.8% |
33.3% |
Data source: Enphase.
A full home energy solution
Enphase microinverters use semiconductor-based architecture that forms an Internet-of-Things (IoT) system with communication gateways and cloud software. This includes its Envoy data gathering and Enlighten software. President and CEO Badri Kothandaraman explains that it is all part of its Ensemble energy management technology that brings ease of use for installers and users, and differentiates it from its competitors. Ensemble now also includes energy storage, with its Encharge system. All combine to bring solar-power system users the technology for the most efficient energy use when power grids are operating, and availability of power when grids are down.
Image source: Getty Images.
There is, however, plenty of competition in the space. Israeli company SolarEdge Technologies (SEDG +6.39%) has its own approach using optimizers at each panel, with a central single-phase inverter, which it says is more efficient and cheaper. It had revenue growth of over 50% in 2019, mostly from its solar business. And Generac Holdings (GNRC 1.75%), known mainly for home generators, has introduced a new solar battery storage and energy management system, after making two acquisitions in early 2019. This is a quickly growing market, though, so there is room for more than one supplier.
About that premium...
Enphase isn't alone in benefiting from the recent growth in the sector. SolarEdge and Generac have also been on investors' minds. Enphase estimates that its serviceable available market (SAM) will grow from $3.3 billion in 2019 to $12.5 billion in 2022. That's an astounding compound annual growth rate of 56%.
But Enphase is trading at a higher premium than its peers, with a forward price-to-earnings ratio of about 43.
ENPH P/E Ratio (Forward) data by YCharts.
Some of the reason for this may be that its business is concentrated with one-third of sales going to its two largest customers in 2019. But it continues to update its offerings. Its eighth-generation microinverter -- the IQ8 for residential, and the IQ8D for small commercial solar -- will be released in 2020. Management also said it is pleased with demand for its Encharge battery storage, based on pre-orders. It is already gearing up for its second-generation version of the Ensemble energy management system, and it is focusing on India's portion of its SAM with an off-grid solar and storage system dubbed Ensemble in a Box.
Market cycles
Whether the current premium for Enphase stock is justified may be determined by how well it performs in a down market cycle. The current economic uncertainty brought on by the COVID-19 pandemic will be the first down market the company has seen since it has boosted sales, margins, and expanded its offerings.
Enphase has two large customers that made up 21% and 12% of its total net sales in 2019, respectively. It has a strong relationship with SunPower, which is presumably one of them. SunPower recently announced it was idling its factories in five countries to align inventory with demand, though it also said it expected that the operations would restart in the coming weeks.
A drop in demand seems inevitable given the impacts of the global pandemic. How Enphase manages through the economic slowdown will determine whether the stock's current premium is justified. It has positioned itself well to grow with its market. Whether, or when, that market growth resumes should be the focus of investors who own Enphase, or have it on their watch list.
