Enphase Energy Stock: Marriage Of Value And Potential (NASDAQ:ENPH)

Today, we take a look at Enphase Energy (NASDAQ:ENPH), a forward thinking energy technology company specializing in solar power and energy storage. I believe that with all things considered, ENPH stock is trading at a discount.

Recent price movements

Just a few days ago, ENPH stock experienced a massive selloff followings its Q3 earnings report. The company’s Q3 revenue took a huge hit, being down about 13% year-on-year. Enphase also expects to bring in $300m to $350m in revenue in Q4, which is a far cry from the consensus estimate of $577m. A relatively pessimistic earnings report for the third quarter saw shares tank about 17% – currently trading at about $78 when its share price prior to the Q3 earnings report was about $95. With such a massive correction in stock price, does this present a buying opportunity for ENPH stock? Let’s dive deeper.

Strong growth over the past 5 years

The company itself offers various products, though it is notably specializing in producing solar microinverters, energy storage, and more recently, EV chargers. Financially, Enphase has grown tremendously over the years.

Revenue

Following the rising demand for sustainable energy products, Enphase’s sales have grown tremendously in the past few years. The above graph illustrates an annualized revenue growth of about 30% from 2015 to 2022. The strong increasing trend is a good indicator that Enphase’s sustainable energy solutions have proven to be effective and well accepted by its target audience, which are residential customers.

Profitability

We observe from Enphase’s gross profit margin and operating margin that the company has been relatively profitable in recent years, reaching levels above 20% for both metrics. This is a good indicator of profitability – while maintaining its rising sales over the years, Enphase has also managed its costs efficiently to achieve such margins despite rapidly changing economic conditions.

Free cash flow

The above figures show the free cash flow and free cash flow growth of Enphase from 2018 to 2022. We see that the company’s free cash flow growth has been extremely strong in the past 5 years, growing from $11.98m to a massive $698.37m. A strong amount of free cash flow gives rise to multiple growth opportunities for Enphase, and also allows it to pay off debt, buy back shares or pay a dividend.

Lucrative sectors

The three key sectors Enphase is branching into are solar power, electric vehicles (EV) and energy storage.

Solar power

The global energy crisis has given rise to a boom in the renewable energy sector. In particular, solar power has experienced massive growth over the past decade.

Based on the chart above, we see the exponential increase in U.S. solar installations from 2010 to 2023. According to Solar Energy Industries Association, solar has grown at an average of 24% annually in the last decade alone. In the case of Enphase, we are looking at a company that has solar microinverters as one of its main products. These products help to maximize electricity generated from the solar panels – hence working hand-in-hand with these panels to champion solar energy as a renewable energy source.

The company itself has also been aggressively expanding into international markets, particularly in Europe. Distribution partnerships with Baywa r.e. and 4blue have allowed Enphase to gain access to markets in Netherlands, Poland, Germany, Luxembourg and Belgium. Given that solar is the renewable energy source that is being adopted at the highest rate in Europe, we can expect strong revenue from international markets in the years to come, especially for Enphase – one of the leading providers for solar microinverters.

On the whole, global solar power is expected to rise at an average of about 15% till 2027. This is no surprise, as countries worldwide are continuously finding alternative energy sources to reduce their environmental footprint. Enphase is tapping into a growing market with its product offerings in the solar power space, and this is a good sign that the company will remain relevant in the many years to come.

Electric vehicles

It is no secret that the growth of the EV industry has taken the world by storm. Big players like Tesla (NASDAQ:TSLA) and General Motors (NYSE:GM) aim to do their part in the world’s transition to fully electric vehicles. Now, how does Enphase participate in this rapidly growing industry?

As the world starts to cement EVs as the standard mode of transport, we also see a projected rise in demand for EV chargers. Understandably, such products are necessary, working hand-in-hand with EVs to make the full transition into such vehicles feasible. This is where Enphase comes in.

Apart from its impressive offerings in the solar space, Enphase has also proven to be a trusted provider of EV chargers. As an upgrade from its current products, the company plans to launch a new bidirectional EV charger which employs a vehicle-to-grid system for more sustainable power generation. The new charger also offers a vehicle-to-home system that allows one to restore power to a home that has experienced a power outage. We have lots to look forward to with regard to Enphase’s breakout into the EV charger industry.

Energy storage

With all this talk about energy, one important point is that we need a way of storing it efficiently. This is where energy storage technologies come into play – supporting efficient delivery of power and also providing flexibility to consumers by allowing more effective management of energy consumption.

According to Bloomberg, the market for energy storage worldwide could expand fifteen-fold in about 7 years. The graph above is a detailed illustration of the expected increased adoption of energy storage products in various markets. From under 25 GW in 2020, we see a projected number of over 400 GW in energy storage installations just a decade later. The energy crisis has sparked intense demand for efficient usage of our current resources, and energy storage plays an integral part in ensuring our energy is managed effectively and efficiently.

Enphase’s IQ Solar Battery system is the company’s flagship energy storage product. Integrated with microinverters, the solar battery system provided by Enphase provides storage for backup power which you can tap on whenever you need it – even in the situation of an outage. The company’s newest release, the IQ Battery 5P, boasts higher efficiency and more impressive peak-power output compared to previous models. As we see the company innovate continuously in the energy storage space, we can be reasonably optimistic about Enphase’s future relevance and profitability.

However, let’s not get ahead of ourselves yet. There are certain concerns we have to consider.

Recent performance

As mentioned in the very beginning of the article, Enphase definitely got on the wrong side of its investors after the most recent earnings report in Q3 2023. The 13% YoY drop in revenue, and an expected Q4 revenue that’s about half of consensus estimates is definitely not negligible. The company foresees a huge reduction in demand in the near future due to rising interest rates and new policies lowering solar homeowners’ financial incentives for having excess electricity. However, Enphase’s CEO, Badri Kothandaraman, remains optimistic and expect recovery towards the middle of 2024 – mentioning that the recovery will be done through new product offerings in various markets. While we applaud Enphase’s strong trajectory over the past decade, we must acknowledge that the company is facing headwinds in its revenue generation.

Solvency

Enphase currently has $1.22b in long-term debt, which is about 1.75 times of its free cash flow of $698.37m. This works out to a free cash flow to long-term debt ratio of 0.57, which isn’t fantastic considering it indicates that the company is currently unable to pay off its long-term liabilities with cash. The company also currently has $3.08b in total assets and $2.26b in total liabilities, which works out to a debt ratio of 0.73. This is an indicator that most of Enphase’s assets are financed through debt as opposed to equity. While this is not an immediate cause for concern, we should take a company’s solvency into account before investing in it.

Industry competition

When we think of Enphase’s biggest competitor, most analysts will bring up SolarEdge (NASDAQ:SEDG). SolarEdge is a direct competitor to Enphase in the solar space, particularly in the market for inverters. While SolarEdge’s string inverters and Enphase’s microinverters are neck-and-neck in terms of utility, there are also cost considerations since a microinverter is more expensive than a string inverter. Also, the traditional and reliable nature of SolarEdge’s ‘old-school’ string inverters could instill more confidence in consumers. As of end 2019, the two companies have managed to dominate 80% of the U.S. Residential Solar Inverter Market, and the competition continues as Enphase moves forward with its product innovation while SolarEdge produces more cost-effective solutions.

With all these things considered, we will now use an EPS projection model to determine a fair value for ENPH stock.

Valuation

We will now be using a 5-year EPS projection model to determine a fair valuation of ENPH stock. We will have a bear case, base case and a bull case, and the valuations will be based on a trailing-twelve-month EPS of 4.2, a weighted average cost of capital of 13% and projected price-to-earnings ratio of 20. The assumptions I will be making are based on Enphase’s projected annualized growth in earnings and shares outstanding. It is noteworthy that in the past 5 years, Enphase has grown at an annualized rate of 49.4% and 7.9% for its earnings and shares outstanding respectively.

Bear

In a bear case where current headwinds become too tough a nut to crack for Enphase, I believe that revenues will slow down in the coming years. As such, the companies’ net income is likely set to grow at a more modest rate compared to the past 5 years. I also assume that the company continues to issue shares at an annualized rate of 8%. My assumptions are as follows.

Annualized earnings growth: 10%

Annualized shares outstanding growth: 8%

We see that the intrinsic value of ENPH stock based on these assumptions is $50.91.

Base

In the base case where Enphase does eventually get back on track mid next-year, I believe that revenues will grow in a steady manner, especially with the company’s efforts in innovation and market diversification. As such, the companies’ net income is likely set to grow strongly, but likely at about half the current rate as the company’s growth cools down a little after achieving consistent profitability. It’s good to note that analysts expect an average annualized growth of 27.6% in earnings over the next 5 years. I also assume that the company continues to issue shares at an annualized rate of 8%. My assumptions are as follows.

Annualized earnings growth: 25%

Annualized shares outstanding growth: 8%

We see that the intrinsic value of ENPH stock based on these assumptions is $96.47.

Bull

In the bull case where Enphase meets all analyst estimates in the next 5 years, I believe that the company can achieve an average annualized growth of 27.6% in earnings over the next 5 years, which is completely in line with analyst expectations. I also assume that the company starts to buy back shares with its growing free cash flow, and issues shares at an annualized rate of 4%. My assumptions are as follows.

Annualized earnings growth: 27.6%

Annualized shares outstanding growth: 4%

We see that the intrinsic value of ENPH stock based on these assumptions is $129.14.

Analysis

We take the simple average of the 3 price targets and arrive at $92.17 a share as fair value. Let’s compare this to current analyst ratings.

Very clearly, we see that despite the multiple downgrades by analysts due to poor earnings in mid to late 2023, most price targets remain well above the current market price of about $78.

Investment decision

While there is industry competition and some concerns about the company’s solvency and recent earnings, I do believe the company is poised for a strong recovery in 2024 with its new product launches and continuous expansion into different markets worldwide. Based on my assessment of ENPH’s strong fundamentals and market potential, and also considering its current valuation, I believe that the stock has room to run and is a ‘Buy’ at current prices, with a price target of $92.17 a share.