One of solar energy's biggest comeback stocks of the last few years has been Enphase Energy (NASDAQ:ENPH). The microinverter company was almost delisted from the Nasdaq exchange in 2017 and was in need of a bailout from investors. But since then, its finances have improved and growth has surged.

Behind the move is impressive growth and growing profitability as microinverter use increases. The question for investors now is whether this is a stock worth adding to your portfolio.

Roof with large solar installation on a sunny day.

Image source: Getty Images.

Enphase's huge comeback

I want to start by highlighting what has happened at Enphase Energy over the last three years and why the stock has made such gains. You can see that the company has grown revenue, particularly pre-COVID-19, but the biggest improvement has been in its gross margin

ENPH Revenue (TTM) Chart

ENPH Revenue (TTM) data by YCharts.

Enphase Energy was able to cut costs with its new IQ 7 line of products, and as scale has increased, gross margin has continued to go up. And this improvement may be sustainable because it has integrated more fully with manufacturing partners.

Going straight to the factory floor

A big change in Enphase Energy's strategy over the last few years is integrating itself with solar panel manufacturers. Its first big partnership was with Maxeon Solar Technologies, formerly SunPower's manufacturing arm, which makes some of the industry's highest-quality and highest-efficiency solar panels in the world. LG, Panasonic, and Solaria then followed with solar modules that have microinverters attached on the factory floor, known as AC solar panels.

Integration at that level enables higher-volume sales and lower costs for a company like Enphase Energy. And it's proven to be a winning move given the financial results we see above. 

Is there a limit to growth? 

The one thing that makes me nervous about Enphase Energy's stock is its valuation. Shares trade at 22 times sales and an incredible 93 times earnings. And there may be limits to how much Enphase Energy can grow. 

ENPH PS Ratio Chart

ENPH PS Ratio data by YCharts.

Fundamentally, Enphase Energy's growth is limited to the residential and commercial solar market, where microinverters and small energy storage systems make sense. But it already has a 19% market share in the U.S. and SolarEdge controls 61% of the market. Enphase could take market share, but the U.S. residential and commercial solar markets are growing relatively slowly. In fact, residential installations in the U.S. only recently surpassed levels seen in early 2016. 

I could see Enphase potentially doubling its market share over the next few years and gaining traction with energy storage products that have been introduced. But right now you can see that revenue has plateaued, so I don't see a reason to believe that Enphase will be a stock worth a price-to-sales ratio of 22. 

Growth opportunities don't match the valuation

The current revenue multiple implies years of double-digit growth, and that only sets investors up for failure if the market shifts or growth slows. That's ultimately what will keep me out of the stock today. 

I like Enphase Energy's products and future in the solar industry, but it's priced like a tech stock and not a solar energy stock that goes through cyclical ups and downs and can see its products go out of favor relatively quickly. Solar energy stocks haven't historically been able to live up to those kinds of multiples, and it's too big a risk to think Enphase Energy will be any different. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.