Financial Pros Pick Love THIS Solar Stock

Investing in clean energy is a tricky business.

While there’s a clear push by world powers, the financials aren’t quite there, nor are the supply chains.

It’s led to massive expansions and contractions in the sector.

Yet, Enphase Energy (ENPH) is trying to carve out a niche for itself.

Instead of focusing on manufacturing solar panels, the company creates microinverters and other products that boost system efficiency and build a home ecosystem.

Shares are down more than 60% from their all-time highs at the end of 2022.

But with consistent growth and cash flow, could this be a chance to get a premium stock at a discount?

Enphase’s Business

Let’s start with a quick explanation of solar panel systems.

Solar panels produce direct current (DC), which an inverter converts to alternating current (AC) for home usage.

The cheapest way is to wire all the panels to a single inverter. However, the power output is only as great as the lowest producing panel. Got shade on one and all the panels produce as much power as the max from that shaded panel.

Power optimizers from SolarEdge (SEDG) isolate each panel alleviating the one-takes-down-all problem. This system still requires a main inverter, which can fail.

Enphase puts microinverters on the back of each panel that alleviates both the one-takes-down-all problem and the single failure point. It’s also scalable whereas SolarEdge can scale to a certain point.

The high efficiency of their products allows them to charge a premium.

Enphase produces a wide array of solar-related products that complement each other including battery packs, EV chargers, and more.

Source: Enphase Investor Relations

U.S. sales account for roughly 62%, while international sales make up the rest.

Financials

Source: Stock Analysis

Revenues exploded in the last few years as solar adoption grew across the globe. Even low-end forward growth still puts the company up +33% YoY.

Meanwhile, all the company’s margins expanded substantially, helping the company go from negative free-cash-flow in 2017 to kicking out almost a third of revenues as free cash flow.

That’s allowed the company to grow its cash holdings in excess of its debt and use that money to repurchase shares.

Valuation

Source: Stock Analysis

Although the graphic doesn’t show it, ENPH and SEDG trade at roughly 21x forward operating cash flow, in line with First Solar (FSLR).

While the P/E guidance isn’t great, considering the company’s growth metrics, anything under 50x is decent.

Growth

Source: Seeking Alpha

Speaking of growth, ENPH has made a name for itself by working with large solar manufacturers instead of trying to compete with them. 

That’s allowed it to deliver consistent revenue and EBITDA growth for the last several years.

SEDG has as well, but hasn’t demonstrated the same cash flow growth.

Profitability

Source: Seeking Alpha

We love ENPH’s industry-leading profitability and return on equity, assets, and total capital.

Given the low debt and high cash flow, we expect this to improve in the coming years.

Our Opinion 7/10

Enphase is an excellent company with fantastic growth. It’s starting to get cheap here at 20x free cash flow.

However, the stock is in freefall. So, it’s best to wait until the stock shows signs of a technical bottom before jumping in.

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