The solar energy sector is a densely populated, yet fragmented, market. One of the more innovative solutions available on the market hails from a lesser-known brand, Enphase Energy (ENPH 3.80%).
The glaring issue for investors, however, is Enphase's stock price appreciation -- or lack thereof. The stock has cratered over 50% year to date, and it could easily fall further after the company reports third-quarter earnings later this month.
With such small near-term prospects, how can this stock possibly make you rich? Let's dig into the catalysts of the solar energy sector at large and assess how these tailwinds could carry meaningful long-term growth prospects for for Enphase.
Up, down, and side to side
To say that Wall Street analysts are divided on Enphase stock would be an understatement. In October alone, at least eight banks issued updated price targets for the stock. Perhaps most notably, Bank of America downgraded Enphase and lowered its price target to $102, which implies about 18% downside from current trading levels. On the other hand, Piper Sandler, BMO Capital Markets, and Susquehanna each maintain ratings of "hold" or "buy equivalent" despite the fact that all three lowered price targets.
Even with the downward revisions, both Piper Sandler and BMO see roughly 20% upside in the stock, while Susquehanna is calling for roughly 50% upside from current trading levels.
The disparity and wide-ranging opinions from sophisticated analysts can make it difficult to decide if Enphase is worth an investment. It's clear that some analysts on Wall Street carry a more pessimistic view of Enphase's ability to penetrate markets during a challenging economy. This is why I encourage investors to look at the big picture.
Solar energy is an expensive investment. During times of rising interest rates and high labor costs, businesses and homeowners alike may not be able to afford such a luxury. However, while the Federal Reserve has not been explicit about when interest rates will taper, it's also obvious that rates will not go up forever.
Additionally, since the market for green energy and solar is still very much evolving, investors should consider the progress the company has made. For instance, during Enphase's second-quarter earnings call, leadership said that residential solar penetration in the U.S. is only about 5% right now. Some investors and analysts may find this data point mundane and discouraging. As a contrarian, I find it intriguing and opportunistic.
Longer-term investors should be thinking about Enphase's ability to grow once the economy reaches a more stabilized position. Given the company's financial results, highlighted below, I feel that Enphase is already demonstrating its ability to act swiftly and take on broader headwinds.
Image source: Getty Images.
Should you invest in Enphase Energy?
The table below illustrates revenue and free cash flow for Enphase over the last several quarters.
| $ in millions | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
|---|---|---|---|---|---|
| Revenue | $530.2 | $634.7 | $724.7 | $726.0 | $711.1 |
| Free cash flow | $192.0 | $179.1 | $237.3 | $223.8 | $225.2 |
Source: Company investor presentation.
When looking at these financials, it's clear that Enphase's revenue profile is anything but linear. Given the macroeconomic factors discussed above, it shouldn't be entirely surprising to see how much the company's sales ebb and flow. While unsteady revenue certainly makes forecasting and future guidance more challenging, there is another takeaway here that is arguably more important.
Despite the rocky nature of its revenue, Enphase has done a solid job consistently generating free cash flow -- reporting nearly $200 million in each of the last five quarters.
ENPH Price to Free Cash Flow data by YCharts
Yet despite this impressive feat, the stock's price-to-free cash flow ratiois down 70% so far in 2023. In other words, Enphase's stock keeps going down even though the business, from a liquidity perspective, is actually quite strong despite volatile revenue.
The obvious hurdles in Enphase's way right now stem from macroeconomic challenges. But overall, the total size of its market is too big to ignore. Moreover, the company has made major strides overseas, which demonstrates its ability to pivot and be flexible when other markets are strained.
I view Enphase as a clear market leader with a strong business that is being ignored. Now could be an interesting time to buy the dip in Enphase stock. But remember, investors need to exercise patience with this company. I think it will take some time before solar energy becomes more mainstream for businesses and households alike. However, given the rise in ESG initiatives and Enphase's strong financial position, I think the company is well-positioned to benefit from longer-term trends in green energy.
