This Solar Stock is Heating Up

The recent heat wave in California has put significant pressure on its electrical power grid. Many fear that its on the verge of blackouts, as demand is approaching record levels. 

Could solar be the answer to the problems with the electrical power grid?

Wall Street reacted like it is, as solar stocks have spiked significantly higher over the last few trading sessions. The largest player in the space, Enphase Energy (ENPH), just hit record highs.

Unsurprisingly, searches for the little-known solar play skyrocketed to the top of the list for amongst financial pros and retail when searching for semiconductor equipment and material stocks.

In fact, it garnered 3x the search volume as any solar stock from First Solar (FSLR) to SunRun (RUN).

But does that make it a solid investment or just a momentum play?

Enphase Energy’s Business

Enphase Energy, Inc. (ENPH) is a global energy technology company. 

It’s the world’s leader in supplying microinverter-based solar-plus-storage systems. 

ENPH delivers smart solutions that connect solar generation, storage, and energy management on one platform. 

The firm’s semiconductor-based micorinverter system converts energy at the individual solar module level, bringing a system based high-tech approach to solar energy generation, storage, control, and management. 

ENPH has shipped more than 48 million microinverters, and more than 2.5 million systems in more than 140 countries. 

The company announced a record quarter in revenues during Q2 2022, posting $530.2 million. 

Financials

From 2017 to 2021, ENPH grew their revenues from $286.17 million to $1.38 billion, representing a growth of nearly 5x. Its 12-month trailing revenues currently stand at $1.748 billion. 

ENPH has a strong financial footing. The firm had $1.25 billion in cash last quarter and total debt of $1.31 billion, with a market cap of $37.8 billion. It has a current ratio of 3.62x, implying that it has plenty of liquid assets to cover its short-term liabilities. 

And every one of its margins has expanded, with profit margins turning positive in 2019/

Valuation

While ENPH has grown exponentially, it trades at a massive premium. 

The company trades at P/E GAAP of 220x. That’s notably higher than competitors SolarEdge Technologies (SEDG) at 122.5x and First Solar (FSLR) at 77.9x. 

Furthermore, ENPH trades at a price-to-sales ratio of 24.5x, significantly higher than its 5-year average of 10.9x. Moreover, its competitors FSLR has a price-to-sales ratio of 5.79x, SEDG at 6.76x, and Sunrun (RUN) at 3.9x. 

Profitability

While valuation is a concern, no one can deny Enphase’s profitability. 

The firm has a gross profit margin of 40.3%, notably better than SEDG at 28.2%, RUN at 13.5%, and FSLR at 16.9%. 

Furthermore, its return on equity of 39.2% is head-and-shoulders above its competitors, SEDG at 8.8%, RUN at -12.1%, and FSLR at 3.2%. 

At an EBITDA margin of 17.3%, ENPH outshines its competitors, SEDG at 9.8%, RUN at -13.3%, and FSLR at 15.7.

Growth

Not only is ENPH the largest player in the solar space, but it’s also growing revenues faster than its largest competitors. Enphase’s revenue growth (YoY) is 63.5%. Meanwhile, SEDG is at 55.6%, RUN at 54.3%, and FSLR at -16.5%. 

Our Opinion 4/10

While there is no denying that ENPH is in a hot sector that’s growing fast. 

It’s hard to justify an investment when the stock is trading at such a high P/E ratio. Tesla (TSLA), which also offers solar, trades at a lower P/E ratio than ENPH, and at a much lower price-to-sales ratio. 

We do like ENPH and believe it has a bright future, but would rather wait for a dip than buying at these levels.