Up More Than 400% in the Past Year, is Enphase Energy Still a Buy?

Enphase Energy, Inc. (ENPH), together with its subsidiaries, designs, develops, and sells microinverter systems for the solar photovoltaic industry in the United States and internationally. The company was founded in 2006 and is headquartered in Petaluma, California.

ENPH was one of the best performing stocks of 2020,  gaining 407.8% over the past year.  Its  impressive performance  helped it secure a place on the S&P 500 index last month. This, combined with investor optimism over the worldwide clean energy drive, has helped the stock gain 10.1% year-to-date.

ENPH’s price growth has been backed by its financial and fundamental strength. However,  major countries around the world are currently so focused on mass coronavirus vaccinations and their countries' economic revivals, that many have placed their climate change plans on hold for at least the first half of the year. This could mar ENPH’s growth.

Here is what we think could shape the performance of ENPH in the coming months:

Favorable Analyst Estimates

Analysts expect ENPH’s EPS to rise 48% in the current year and at a rate of 36.7% per annum over the next five years. A consensus revenue estimate of $1.25 billion for fiscal 2021 represents  a 63.6% improvement year-over-year.

Weak Financials

ENPH’s  most recent quarter’s earnings and sum of its trailing four quarter’s earnings were positive. However, the company’s revenues declined slightly year-over-year in the third quarter ended September 30, 2020. Moreover, its non-GAAP operating expenses have increased 13.6% sequentially to $29.60 million. Its non-GAAP EPS of $0.30 remained unchanged from the year-ago value over this period.

The company’s trailing12-month gross profit margin of 41.96% is 12.9% lower than the industry average of 48.19%.

Stretched Valuation

In terms of forward p/e, ENPH is currently trading at 153.55x, which is 469.2% more expensive than the industry average of 26x. Its forward price/sales of 31.95x is 674% higher than the industry average of 4.13x. Also, its forward price/cash flow ratio of 148.77x is 581.6% higher than 21.83x.

Mixed Macroeconomic Outlook

Climate change has been headline news over the past year, with the world’s major economies formulating and announcing policy changes to reduce their carbon footprints. Indeed, tackling climate change has been one of the focal points of Biden's presidential campaign.

In January, President Biden re-entered the U.S. in the Paris Climate Accords and revoked the Keystone XL pipeline permit in January, reflecting his commitment to climate change initiatives. The government’s proposed $2 trillion so-called Green economic package is expected to set in motion initiatives to  boost the clean energy industry as a whole.

However, these, various initiatives will take some time to get rolling as the government targets most of its efforts to  dealing with  pandemic disruptions. The U.S. government is currently spending billions of dollars on COVID-19 relief,  with the goal of receiving consumer spending to jump start the economy out of its recession. Biden announced the fast tracking of his $1.9 trillion fiscal stimulus package yesterday, which is expected to be passed in short order.

With the government focused on fixing pandemic-induced economic damage , funding for climate change has currently taken a back seat. With funding being directed towards the fiscal stimulus package and mass vaccines, the clean energy  and sustainable infrastructure drives are  not expected to witness any major progress in the near term. Consequently,  analysts expect ENPH’s EPS to decline 5.3% in the quarter ending March 2021.

Another major factor behind  macroeconomic uncertainty is the divided Houses of Congress. The Democratic party, which acknowledges the climate change imperative, dominates both the houses by small majorities. This means that, realistically,  that  passing  climate-oriented plans, will require backing from some Republicans, But, with the latter party’s less than full acknowledgment of climate change, the chances of success for the clean energy drive are questionable in the near term.

Analyst Price Target and Ratings Do Not Reflect Enough Upside

Analysts expect ENPH to decline 16.9% to hit $160.19 in the near term. Moreover, of 19 Wall Street Analysts that rated the stock, only 2 rated it Strong Buy.

POWR Ratings Indicate Uncertain Prospects

ENPH has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system evaluates each stock on a total eight  different categories. ENPH has a grade of A for Momentum, owing to its impressive price gains over the past year. However, it has a grade of D for Value and Growth, given its stretch valuation and inadequate financial performance.

ENPH is currently ranked #6 of 17 stocks in the F-rated  Solar industry. In addition to the grades I’ve highlighted, you can check out ENPH’s POWR Ratings for Stability, Sentiment and Quality here.

Better than ENPH: Click here to learn about top rated Solar stocks.

Bottom Line

Despite ENPH’s  impressive rally over the past year leading to its inclusion in the S&P 500 index, its sky-high valuation and unfavorable macroeconomic conditions clouds its future growth prospects.

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ENPH shares were trading at $195.01 per share on Monday afternoon, up $1.81 (+0.94%). Year-to-date, ENPH has gained 11.14%, versus a 4.12% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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