Investors are always looking for multibagger opportunities that can potentially change their fortunes. However, it is extremely difficult to spot such opportunities, except in the rearview mirror. Prudent investing involves finding opportunities that you genuinely believe in and understand and then staying invested in them for the long term.
One growth stock that has generated eye-popping returns for its investors is Enphase Energy (ENPH -2.46%). More importantly, the company looks strongly positioned to grow in the years to come. Let's see how much you would have today had you invested $10,000 in the stock five years ago.
The stock is up 8,980% in five years
In July 2016, Enphase Energy stock was trading at $1.82 per share. If you had invested $10,000 in the stock at that time, your investment would be worth $908,130 today. What's more, if you had a crystal ball, you could have bought it at its lowest closing price of $0.70 on May 18, 2017. An amount of $10,000 invested at that time would be worth $2.4 million today.
Image source: Getty Images.
Enphase Energy stock is up 8,980% in five years, far outperforming S&P 500 index, which is up 97% over the same timeframe.
What's driving Enphase Energy stock?
Enphase Energy is a turnaround story. Founded in 2006, the company installed its first microinverter in 2008. Microinverters convert direct current (DC) produced by a solar panel into alternating current (AC) and are attached to each panel. Enphase Energy grew its revenue rapidly over the years, until it faced significant competition from new entrants. In particular, SolarEdge (SEDG -2.77%) came up with a much cheaper alternative to convert DC from panels into AC for use. Its optimizers get attached to string inverters and proved more cost-effective.
Enphase Energy struggled on the market share and profitability fronts and its stock price dipped in 2016 and 2017. The company then focused on reducing its costs and returned to revenue growth in 2019. The company set a baseline financial target of generating 35% gross margin, keeping operating expenses lower than 15% of the sales, and generating at least 20% operating margin. Enphase Energy has been largely performing in line with this target for the past several quarters. Enphase Energy's turnaround came after it acquired microinverter business from SunPower (SPWR -2.21%) in June 2018. As part of the agreement, Enphase also got exclusive rights to supply microinverters and related equipment for SunPower's residential solar business for five years.
ENPH Revenue (Quarterly) data by YCharts
As the above graph shows, Enphase Energy's revenue growth and gross margin has exceeded that of SolarEdge's since 2019. This outperformance continues, with Enphase Energy reporting 47% revenue growth in the latest quarter, while SolarEdge's revenue fell 6%.
Overall, Enphase Energy looks well placed to grow its revenue in the coming years. The company should also benefit from the expected growth in the use of renewable energy, especially solar.
Is Enphase Energy a multibagger stock?
After Enphase Energy stock's spectacular rise in the last couple of years, its valuation has increased tremendously. Investors booked some profits early this year on valuation concerns. Enphase stock is now 23% off its high price in 2021.
ENPH PE Ratio (Forward) data by YCharts
Enphase Energy stock is trading at a high forward price-to-earnings ratio of 86. That's higher than SolarEdge's ratio of 51. Though both stocks look expensive based on P/E, the ratio doesn't consider the rate of growth of the two companies.
The price/earnings-to-growth, or PEG, ratio divides P/E by the company's earnings growth. Usually, a PEG ratio above one indicates possible overvaluation. Enphase Energy stock has a forward PEG ratio of 0.8, which shows that its higher P/E is in line with its higher expected growth.
Enphase Energy stock may not generate the spectacular returns it did in the past, but it looks well positioned to continue generating market-leading returns in the years to come.
