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Solid First-Quarter Performance Makes These 2 Solar Stocks Attractive

By Rekha Khandelwal - May 5, 2021 at 7:31AM

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Both the stocks plunged despite strong quarterly results.

A strong quarterly result typically leads to a surge in the price of a company's stock. But two solar stocks plunged recently despite reporting strong first-quarter performance. Let's see what caused the stocks to fall, and what to expect for them in the future.

Enphase Energy

There is much to like about Enphase Energy's (ENPH -2.53%) first-quarter results. The company's revenue grew 47% compared to the year-ago quarter. That was higher than the 41% increase Enphase had guided. Gross margin for the quarter was 40.7%, higher than its margin of 39.2% in the same quarter last year.

The company's non-GAAP gross margin of 41.1% was marginally higher than its guidance range of 38% to 41%. Enphase Energy generated $75.8 million in cash from operations -- significantly higher than the year-ago quarter. 

A hand replacing a poster of power station chimneys with one with windmills and solar panels.

Image source: Getty Images.

So, Enphase Energy stock's 14% fall after earnings looks difficult to comprehend. However, it is the company's subdued growth projections for Q2 that have concerned investors. Enphase Energy expects revenue to range from $300 million to $320 million. At its mid-point, this implies a 58% growth over the second quarter last year. However, last year's Q2 was particularly low due to COVID-19. The expected revenue growth is just 3% over Q1 this year.

Enphase Energy management cited semiconductor component supply constraints as the reason behind the low expected growth in shipments. What's more, the supply constraints may affect the company's shipments for the rest of 2021. 

Considering that the stock is up 2,910% in the last three years, the current fall makes sense, as Enphase's growth could be constrained in the short term compared to what the stock's valuation was baking in. However, some of the lost sales this year could shift to the next year when supply constraints get resolved. Moreover, despite the near-term headwinds, the market for the company's microinverters is expected to grow consistently in the long term.

The U.S. Energy Information Administration predicts that solar energy's share in global electricity generation may rise to 20% by 2050 from just 3% right now. As a top supplier of products that enhance power generation from solar panels, Enphase Energy stands to benefit from this expected growth.

Another factor that likely caused the stock to fall is its valuation. Though Enphase Energy's stock looks overvalued, it isn't so considering its high expected growth rate. The stock's forward PEG ratio, or price/earnings-to-growth ratio, is well below one. A lower PEG ratio is considered better, while a ratio above one indicates possible overvaluation.

For the above reasons, Enphase Energy stock's 35% fall off its high this year presents a potential buying opportunity for long-term investors.

First Solar

First Solar (FSLR -0.30%) stock fell more than 12% on its earnings. The company reported net sales of $803.4 million, up 32% sequentially and 51% above the year-ago quarter. However, its gross margin slid from 26.2% in the fourth quarter last year to 23% in Q1, though the margin was higher compared to 17% in the year-ago quarter. In addition to lower margin, it was probably First Solar's lowered gross margin guidance for 2021 that concerned investors. 

Solar panels in field

Image source: Getty Images.

First Solar lowered its guidance range for the 2021 gross margin to $695 million to $775 million, from the previously guided range of $710 million to $775 million. At the same time, it raised its sales guidance for the year from $2.85 billion to $3.0 billion to $2.85 billion to $3.025 billion.

Notably, at the mid-point, the change in guidance ranges implies just a marginal fall in gross margin from 25.4% to 25%. So, this doesn't look like a reason big enough to warrant a more than 12% slide in the stock. Moreover, First Solar has been generating industry-leading margins in recent quarters.

Tariff and trade policies of governments of countries where First Solar conducts business may also potentially affect the company's performance. As an example, tariffs under Section 201 of the Trade Act benefit First Solar. The section imposes tariffs on imported solar modules and cells from certain countries.

However, certain products, such as the thin-film solar modules that First Solar makes, are exempted from these tariffs. Such an exemption gives First Solar an edge over its competitors. Section 201 tariffs are about to expire in February 2022. If these are not reinstated, First Solar could face increased margin pressure.

While there are risks, First Solar has grown its sales and margins handsomely over the years. Its quality products and low-cost manufacturing in Malaysia and Vietnam position it well to face competition head on. What's more, the stock is 29% off its high this year and is trading at an attractive price-to-earnings ratio of 16. First Solar's bright prospects and its stock's attractive valuation make it a buy right now.

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
$293.50 (-2.53%) $-7.63
First Solar, Inc. Stock Quote
First Solar, Inc.
$117.86 (-0.30%) $0.35

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