Erratic financial results are among the top reasons keeping investors away from solar stocks. However, Enphase Energy (ENPH 3.95%) seems to be bucking the trend by delivering consistently strong performance. Let's discuss if Enphase can continue to beat the competition and grow in the long run.
Enphase's strong revenue growth
Enphase Energy's fourth-quarter results, reported on Feb. 8, showed that revenue for the quarter grew 56% year over year to $413 million. The increase was driven by higher demand for the company's key offerings, microinverters and batteries.
And Enphase generated a healthy non-GAAP gross margin of 40.2% for the fourth quarter, unchanged from the year-ago quarter. The company's GAAP gross margin for the quarter was 39.6%.
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Operating income equaled nearly 24% of revenue, or $97.7 million, excluding stock-based compensation and certain acquisition-related expenses and amortization. Its financial performance was in line with its 20% operating-income target. On a GAAP basis, the operating margin was nearly 14%, which improved from 10.6% in the previous quarter.
ENPH operating margin (quarterly). Data by YCharts.
For the full year, revenue grew 78% to $1.4 billion. Operating margin was nearly 25% for the full year; including stock-based compensation and acquisition-related amortization, the margin was still a healthy 15.6%.
Overall, Enphase Energy's revenue growth in 2021 was strong and its margins were healthy. For the first quarter of 2022, the company expects revenue in the range of $420 million to $440 million, which at its midpoint implies 42% year-over-year growth.
Growing while keeping costs low
Enphase is taking several steps to continue growing rapidly. It is launching new products and making constant improvements in existing ones, and is looking at acquisitions. Recently, the company acquired ClipperCreek, a manufacturer of electric vehicle chargers. Enphase plans to sell the chargers along with its existing products, linking them to the Enphase app. This will help its buyers to optimize tariffs and charge their vehicles using solar power.
Among its innovations, Enphase's latest microinverter model, IQ8, does not require a grid connection and can form a microgrid using only solar power, even without a battery.
While focusing on growth, the company realizes the importance of keeping costs in check. It has managed to control its capital and operational costs so far. A globally diversified supply chain and economies of scale are among the factors helping to reduce its costs.
Is the solar stock a buy?
Enphase Energy operates in an industry that has a long growth runway. The share of solar in U.S. power generation is expected to rise to 20% from around 3% right now. That bodes well for solar companies, including Enphase.
Investors' major concern relating to solar component manufacturers is margin erosion due to competition from low-cost Asian manufacturers. But Enphase seems to have a good handle on its costs.
It's trying to return value to its shareholders through share buybacks. The company repurchased roughly 3.2 million shares in 2021, representing around 2.4% of its outstanding shares.
Enphase Energy stock looks pricey based on its price-to-earnings (P/E) ratio of more than 158. But its forward P/E ratio, based on next year's expected earnings, looks more reasonable at 40.
ENPH PE ratio. Data by YCharts.
Moreover, the stock's forward P/E-to-growth (PEG) ratio is well below 1. A PEG compares a stock's P/E to the expected growth in its earnings. Usually, a PEG below 1 indicates that the stock may not be overvalued despite a high P/E. Other things being equal, the stock of a company growing its earnings at a higher rate is expected to trade at a higher trailing P/E ratio.
Considering the strong growth, Enphase Energy stock may not see a major correction from its current levels. Buying on the dip seems to be the best strategy to build a position in the stock for the long term.
