Please ensure Javascript is enabled for purposes of website accessibility

Why Enphase Energy Stock Just Slipped 6.6%

By Rich Smith - May 21, 2020 at 2:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A downgrade could be (part of) the answer.

What happened

Shares of solar energy microinverter maker Enphase Energy (ENPH -3.41%) tumbled more than 10% in early trading Thursday before climbing back to about a 6.6% loss as of 1:45 p.m. EDT. The stock's slide followed a report Wednesday that investor research firm Institutional Shareholder Services EVA had downgraded Enphase rival SolarEdge Technologies (SEDG -1.46%) from buy to overweight.

Woman in a hard hat holding a solar panel.

Image source: Getty Images.

So what

Does selling one stock because another got downgraded make sense, though?

Perhaps not. True, "solar stocks" sometimes trade in tandem, for example, when tariffs are raised or lowered on imported solar panels. But tariffs are actual news, as opposed to downgrades, which are matters of one person's opinion. The downgrade of one stock for any reason (and note that we don't even know the precise reason for ISS EVA's downgrade in this case) doesn't necessarily mean bad things for another solar stock. To the contrary: When the two companies are rivals, bad news for one might mean good things for the other.

And lacking any other news affecting SolarEdge or Enphase or the solar industry as a whole today, I don't see SolarEdge's downgrade -- especially one as minor as a move from buy to overweight -- as being a reason to sell Enphase, too.

Now what

That's not to say there are no other reasons to sell Enphase, however. First and foremost, to my mind, is the stock's valuation of 35 times earnings.

Thirty-five times earnings seems a bit pricey to me, given that Enphase's earnings this year are expected to go down, not up, and that analysts predict (according to data from S&P Global Market Intelligence) that even when earnings do start growing again, next year, they still won't even equal what Enphase earned in 2019.

Moreover, free cash flow at Enphase ($144 million over the last 12 months) is already weaker than reported net income ($227 million). With Enphase generating only about $0.63 in real cash profit for every $1 in earnings it claims, the stock's share price works out to more than 55 times free cash flow -- such that Enphase is arguably even more expensive than it looks on the surface.

If you're looking for a reason to sell Enphase, I think overvaluation is a pretty good one.

Rich Smith owns shares of SolarEdge Technologies. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
$292.90 (-3.41%) $-10.35
SolarEdge Technologies, Inc. Stock Quote
SolarEdge Technologies, Inc.
$319.02 (-1.46%) $-4.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.