Solar power, though around for decades, has seen a renewed interest recently. A push for cleaner energy sources, combined with improving economics for solar thanks to cost reductions, is mainly behind the growing enthusiasm. Several solar stocks soared to new highs in 2020, reflecting investors' positive sentiment for the sector. One such company is Enphase Energy (ENPH 0.58%), whose strong performance during the year sent its stock surging a massive 554% in 2020 as of this writing. But do the company's fundamentals support the stock's steep rise? Let's find out.
Strong operational performance
Enphase Energy has come a long way since 2016 when the company faced a cash crunch and struggled to generate profits. Over the years, Enphase has surely turned itself around by reducing costs while growing revenues. In the latest quarter, the company generated $39.4 million in net income. Its revenue growth in the last couple of years has exceeded that of its close rival SolarEdge Technologies (SEDG 1.29%).
Similarly, Enphase's gross margin growth is also noteworthy. The company has consistently improved its gross margin, which stood at 53.2% in the latest quarter. Excluding a one-time refund on tariffs, the gross margin was still a healthy 41%. Enphase Energy's gross margins surged past SolarEdge's margins in 2019.
Enphase Energy strives to generate 35% gross margin, at operating expenses of 15%, and generate 20% operating income, as a percentage of its sales. With 41% gross margins and 24% operating income in the third quarter, the company is doing great on the operational front.
The company attributes its margin growth to its disciplined products pricing along with strong cost management. Enphase Energy's partnerships with solar module manufacturers allow it to grow revenues at low costs. The module manufacturers integrate microinverters directly with modules at the production stage. In August, Enphase agreed to provide microinverters to one of the top solar panel manufacturers in Europe. Another way in which the company has reduced costs is by shifting some of its production and employee base to low-cost countries.
In addition to microinverters, a key growth area for Enphase Energy is storage products. Energy storage products help align energy demand with supply and make solar generation significantly more competitive compared to conventional energy sources. Thus, energy storage is a huge potential market for solar companies.
Enphase Energy is ramping up the volumes of its new storage product, Encharge. Encharge sales contributed around 10% of Enphase's Q3 revenues.
Increased presence in Europe
One of Enphase Energy's weaknesses was its geographic concentration. The company generated 84% of its 2019 revenues from the U.S. However, Enphase is working on expanding its global operations. In the latest quarter, 22% of its revenue came from outside the U.S. The company is hopeful of generating roughly 30% revenue from international markets by the end of 2021.
Enphase Energy's growth in Europe is particularly impressive. Enphase's revenues from Europe grew 67% sequentially in Q3.
Is Enphase stock a buy?
Enphase Energy expects to generate $245 million to $260 million in revenue in the fourth quarter, which implies a 41% sequential growth. A huge and growing market for solar, combined with Enphase's headway in the microinverters as well as storage products, positions it well for growth. A key risk that Enphase faces is on margin front. Low-cost suppliers may put a strain on the company's high margin. However, I like Enphase's sharp focus on cost reduction. The company looks well-placed to compete on cost side as well.
Still, Enphase stock's enormous rise in 2020 has sent its valuation higher. It is trading at a price-to-earnings (P/E) ratio of 133, forward P/E of 93, and price-to-sales ratio of 32. While the company is well-placed to grow, it would be difficult for it to maintain such high growth rates for long. Having said that, in 2021, the company will likely be able to maintain the current revenue growth rate as well as margins. That may keep the stock price largely elevated in the coming year.