Enphase Energy (ENPH 3.80%) has built a solid business. Its microinverter devices (think of them as the "brains" of a solar power system) are differentiated from the myriad other options on the market, and the company put further distance between itself and the rest of the pack with a great software experience and energy system-adjacent products like battery storage and electric vehicle (EV) charging stations.
The one thing that kept me on the sidelines, though, was fear that a very high valuation on the stock could be a hindrance if increased competition eventually caught up with Enphase. That hasn't exactly transpired, but the stock is down over 30% so far in 2023 anyways. Is this renewable energy stock too cheap to ignore now?
Enphase keeps growing, but is investor enthusiasm waning?
Enphase has been a fast-growing business for years, benefiting from its marquee products: solar system microinverters. These devices control the flow of electricity generated from a solar panel. In simple terms, Enphase's hardware is unique in that each solar panel is equipped with a microinverter, giving the homeowner (or small commercial space or business owner) more control over their system. Along with an app, an expanding lineup of related equipment (batteries to store power when the sun isn't shining, personal EV chargers), and the ability to sell power back to the electric grid, Enphase has transformed itself into a small, renewable-energy powerhouse.
Data by YCharts.
But the first-quarter 2023 earnings report was less than ideal for many investors. You can see from the chart above that quarterly sequential growth stalled out for the first time in a while. Management cited challenges primarily pertaining to rising interest rates, which forced the company's hardware distributors and solar system installers to rethink how to market to homeowners and small businesses. Revenue is likely to be roughly flat once again in Q2 before beginning to heat up again in the second half of this year (at least, that's the expectation).
Despite these challenges as of late, Enphase continues to increase its profit margins and is generating lots of cash. It's also ramping up operations in Europe (a new manufacturing facility in Romania is open), and three manufacturing plants in the U.S. (with some support from the U.S. Inflation Reduction Act) are also getting rolling this year. The expectation is Enphase will return to robust growth in 2024, especially as interest-rate increases are digested and the U.S. economy in particular firms up after a tough 2022 and 2023.
Is this stock a screaming buy?
Besides the expectation that solar systems will continue to charge up in the years to come, Enphase's work in creating a resilient manufacturing chain is starting to pay off. The company is highly profitable, and thanks to the sell-off in the stock so far this year, shares are as reasonably priced as they've ever been -- at least on a free-cash-flow basis. The stock trades for 31 times trailing-12-month free cash flow as of this writing, or 52 times trailing-12-month earnings per share (EPS). Based on expectations for full-year 2023, Enphase trades for 32 times EPS.
Enphase's inverters are growing especially fast in Europe and Brazil and still represent a big opportunity as the company is still just beginning to bring its offerings to market in some areas. But EV chargers for homes and small commercial spaces are a new emerging area too. Enphase is building out an ecosystem for customers interested in building energy self-sufficiency, a movement that could continue to pick up momentum in the coming years as war in Europe and environmental concerns alike push more consumers toward solar.
Is the stock cheap? If you expect Enphase to continue growing profits on a per-share basis by a high-single-digit to low-teens percentage for the foreseeable future (using a discounted cash-flow valuation model and a discount rate of 10%), the stock does indeed look like a good deal right now.
Personally, the bulk of the money I'm betting on the renewable-energy movement sits with chip stocks like Onsemi, which has said it provides chips for the vast majority of solar system inverter manufacturers out there. Lithium stocks also rank high on my renewable-energy bets. Nevertheless, Enphase looks like a nice complement to my holdings at these levels. I recently made a purchase. If you buy too, consider adding this renewable-energy stock using a dollar-cost averaging plan.
