Enphase Stock Hit By Semiconductor Shortage. Time To Buy?

Enphase Energy, a company that produces solar microinverters, has seen its stock decline by 5% over the last week (five trading days) to about $147 per share. The sell-off comes as Enphase’s
ENPH
Q2 revenue guidance fell short of Street estimates, as the company noted that it would be impacted by the current semiconductor shortage. The stock dropped by almost 14% on Wednesday alone. So is Enphase Energy stock poised to fall further or could it see a recovery? Per our machine learning engine, which analyzes historical stock price data, Enphase stock has a 55% chance of a rise over the next one month (21 trading days) after declining by 5% in the last five days. See our analysis Enphase Energy Stock Chances of Rise for more details.

So should long-term investors consider Enphase? Enphase stock trades at about 68x consensus 2021 earnings and about 52x 2022 earnings. While the multiple looks high, Enphase largely justifies this valuation, on account of its high growth rates, relatively thick margins, and solid long-term prospects for the renewable energy market. Microinverters convert the direct current produced by solar panels into the alternating current that can be used by the grid and homes and are less commoditized compared to solar panels. For perspective, Enphase’s gross margins stand at around 40%, compared to solar panel makers such as SunPower
SPWR
and First Solar
FSLR
which typically post margins in the 20% range. Growth is also likely to remain strong, considering the increased urgency to tackle climate change and a more favorable regulatory environment under the Biden Administration, which intends to decarbonize the U.S. power industry by 2035. Enphase’s revenues are likely to rise by over 73% this fiscal year and by 33% next year, per consensus estimates. Now, although the semiconductor shortage is likely to hurt supply growth for this year, the longer-term demand picture remains intact, with margins also remaining robust. With the stock down by over 30% from its all-time highs, this could make for a relatively attractive entry point.

[1/12/2021] Which Solar Inverter Stock Should You Pick?

Solar stocks have fared well over the last year or so driven by low-interest rates and the recent U.S. Presidential elections, which saw the Democratic party – which is seen as pro-renewable energy – regaining a government trifecta. Two of the best-performing stocks have been power electronics suppliers Solar Edge and Enphase Energy, which are up roughly 2.5x and 7x, respectively over the last year. Investors are betting that components such as inverters and related power electronics systems, which are less commoditized compared to solar panels – could offer thicker margins in the long-run. So which of the two companies could be the better pick for investors? See our complete dashboard analysis on Enphase Energy vs. SolarEdge Technologies for a detailed breakdown of the financial and valuation metrics of the two companies.

Overview & Financials

Enphase is best known for its microinverters that connect to individual solar panels and convert the direct current produced by the panel into the alternating current used by the grid and homes. SolarEdge, on the other hand, offers power optimizers that connect to individual panels and centralized inverter systems that convert the DC current to AC.

Enphase Revenues have grown from about $286 million in 2017 to about $624 million in 2019, translating into a growth rate of about 48% each year. SolarEdge’s Revenues, which stand at more than double Enphase’s, have grown from about $607 million to about $1,426 million over the same period, a growth rate of about 53% per year. However, over the last 12 months, Enphase saw revenue rise by 42.1% – much higher than the figure of 19% for SolarEdge, as the company gained market share in the microinverter space. Enphase’s operating margin was 15.2% for the most recent twelve-month period, which is higher than SolarEdge Technologies’s operating margin of 13.2% over the same period. Enphase’s margins have also been trending higher, rising from 0.8% in 2018 to 15.2% over the last 12 months, while SolarEdge’s margins have declined slightly from 15% to 13.2%.

Enphase’s High Valuation, Over-dependence On U.S. Is A Concern

While Enphase’s stronger recent growth and margins expansion make it look attractive compared to SolarEdge, its exceedingly high valuation remains a concern. The company trades about 37x trailing revenue compared to about 12x for SolarEdge. That’s even higher than most technology and high-growth software names. Moreover, the company’s Revenues are also very concentrated, with the U.S. accounting for 83% of its revenue during the first 9 months of 2020, compared to SolarEdge which is more diversified. The U.S. residential solar market, which is a key end market for Enphase, hasn’t been growing too quickly and this could also hurt the company. Considering this, we believe that SolarEdge, which trades at a more modest valuation, could be the better value for investors.

While Enphase stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Hawaiian Electric Industries vs. Tempur Sealy International shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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