JKS - Enphase Energy Stock: Why It's A Good Buy Despite The Headwinds

2023-07-07 09:00:00 ET

Summary

• Enphase Energy presents an attractive buying opportunity in the renewable energy sector, with solar energy expected to experience significant growth in the coming years.
• Despite recent headwinds and a drop in stock price, Enphase remains a leader in software-driven home energy solutions, positioning them to benefit from the expanding solar energy market.
• Enphase's valuation is currently at historically low levels, making it an enticing investment choice, especially when compared to big tech companies.
• With a track record of impressive year-over-year growth and solid gross margins, Enphase demonstrates the potential for long-term success and significant returns in the high-growth renewable energy sector.
• Due to these reasons, we currently rate ENPH as a buy.

Introduction:

Enphase Energy ( ENPH ) got slaughtered after its most recent earnings report at the end of April. The stock dropped close to 27% due to weak guidance for the remainder of the year. Currently, the stock is now back at the same level as April and is down over 50% since its ATH back in December of 2022, which makes this an interesting high-growth stock to look into.

In this article we will take a look at ENPH's prospects for the future and how they are currently valued. We will not only compare them to competitors, but we will also take a look at their valuation compared to big tech companies.

Enphase: Exponential Growth and Renewable Energy Tailwinds

Enphase Energy is a leading designer and manufacturer of software-driven home energy solutions. They manufacture solutions spanning solar generation, energy storage, and web-based monitoring and control.

Renewable Energy is one of the sectors expected to grow significantly in the upcoming decade, as we discussed in the second part of our high-growth series. The total addressable market for solar energy is huge and according to Grand View Research it is expected to keep growing at a compound annual growth rate of 15.7%, which is a significant tailwind for Enphase for years to come.

The chart below shows that ENPH has seen explosive growth over the last decade and is in a great position to continue this trajectory.

Though it's had a good run, its days of exponential growth might be over as the stock is up close to 4000% in little less than 5 years. Nonetheless, ENPH is well-positioned to continue this growth as year-over-year growth remains very impressive, and gross profit is moving nicely with it.

That said, we have to admit that growth is certainly slowing and the transition to renewable energy will be harder than expected. The infrastructure needed for renewable energy requires significant investment and especially in times of economic hardship these investments might be pushed further down the line.

Renewable Energy and Its Current State:

Despite the high infrastructure costs, it is expected that the prices of components for solar energy systems will continue to further reduce due to continuous improvements in technology. Down the line, it is expected that solar energy systems will become cheaper than the currently operating coal or gas power plants, but this is currently not the case yet. In addition, we believe nuclear energy will remain a key component of the overall energy supply for years to come.

The chart below from the U.S. Energy Information Administration ((IEA)) shows that the prices for clean energy overall and for solar panels are dropping over time. As mentioned above, a significant part of the decline in prices is due to investments in technology. That said, over the last 2 years the overall clean energy equipment price and the equipment for solar panels increased in price due to high inflation. This indicates that it is fairly likely that when inflation comes down the prices of the equipment will turn lower again as well.

In addition, Enphase Energy will significantly benefit from the tax credits that were issued by the United States through the Inflation Reduction Act ((IRA)), which was passed last year. As manufacturers get a significant tax credit for their investments in renewable energy, this should have a direct effect on the demand for solar energy, which will thus directly influence the demand for Enphase as well.

The United States is not the only region that gives favorable tax advantages for investments in renewable energy. In Europe, they have the goal to increase renewable energy sources to 45% of all of Europe's energy by 2030 and issued the Net-Zero Industry Act to accomplish this.

Enphase: Becoming Attractive Even With Current Headwinds

Next, we must acknowledge the current headwinds. The weaker guidance and more specifically the slowing growth is a concern. We took a quick look at the stock after it got slaughtered after its recent earnings and made the following Sankey chart of the quarterly income statement. This chart was used in our Twitter thread , in which we took a quick look at the company.

Obviously, we can't expect a company to keep growing at the rates ENPH has done over the last decade. The chart above shows the significant cost of revenue ENPH had in its latest quarter. In addition, revenues didn't grow much at all compared to the quarter before ($726M vs $724.7M one quarter earlier).

The major factor that caused this slowdown is the high interest rate environment. Even when taking the subsidies and tax cuts into account, investing in renewable energy, and in this case more specifically solar energy is still quite expensive. Such big investments are often financed with debt, which is making renewable energy solutions less and less viable in high interest rate environments.

Let's take a look at the valuation. Due to the slowing growth, investors aren't willing to pay such a high premium for growth anymore. This caused the stock to drop to increasingly interesting valuations. As can be seen in the chart below, Enphase Energy is now trading at historically low valuations, not seen since the stock market drop during the Covid-19 pandemic in March of 2020, when the stock was trading between $24 and $30 per share.

Now let's take a look at their peers. As can be seen in the table below, ENPH is definitely not the cheapest when compared to its peers, but it is important to keep in mind that a lot of these businesses are currently not cash flow positive. For example, over a trailing twelve-month period ((TTM)) JinkoSolar ( JKS ) had a $2,616.4M negative cash flow.

In addition, the only businesses cash flow positive in this list are ENPH, [[SEDG]], and [[CSIQ]]. All of the others are cash flow negative and thus currently not profitable investments. Nonetheless, these other businesses remain very interesting, but we aren't sure they are good investments right now.

Currently, Enphase has a 5Y Revenue CAGR of 33.18%. In addition, they have an FCF yield of around 3.67%, which indicates that the company is able to buy itself back in just over 27 years, which is pretty solid for a growth company. All of this in addition with a ROIC of 25.57% with a gross margin above 40% isn't too shabby at all.

Looking further at the table below, CSIQ also emerges as a potentially attractive value investment compared to its competitors. We will probably cover this company soon.

Furthermore, we will also compare Enphase to some of the big tech companies. Why, you might ask? Well, we believe it is interesting to compare the valuation of ENPH to these companies to see how a high-growth company is currently valued compared to the giants of the world.

As you can see in the table below, Enphase Energy is actually quite attractively valued compared to big tech. On a PE basis, it is cheaper than all of them except BABA. Even on a forward Price/Cash Flow basis, ENPH is currently cheaper than giants like Apple ( AAPL ) and Tesla ( TSLA ).

On a price/book basis, ENPH looks rather expensive compared to others with only Nvidia ( NVDA ) and Apple being more expensive.

While big tech is considered to be more stable and to be a steady compounder, it might be interesting for investors to allocate some of their money to a company like Enphase Energy to invest in a high-growth sector, as big tech currently isn't cheap either.

Technical Analysis:

As can be seen in the chart below, ENPH gapped down significantly after the latest earnings. The stock fell right towards the $161 level, which is where the stock is at right now once again. It will be important to see if the stock will hold here, otherwise, we could see a bit more downside in the short term, and a correction towards the low $150's is a possibility.

The stock is currently trading below all of its EMA's on a daily basis as well, indicating that the bears are currently in control. When looking at the weekly EMA's the stock is currently sitting at the 200 EMA. This should be a strong support level, considering the $161 is an important horizontal support as well, making this an enticing entry point if it holds.

In case we lose this level it could get quite ugly and the $114.30 level isn't out of the question. However, it is important to note that the last time the stock dropped below the 200 weekly EMA was in 2018 when the stock was trading at around $4 per share and even then this drop was only swift, less than a year later the stock was up 850%.

In case we bounce here, the first resistance would be the down trending red trendline, which acted as a serious resistance since the all-time high back in December of 2022. A break above this line could see us move quickly towards the $200 level, and even $220+ wouldn't be out of the question then.

It will be important to watch the earnings in less than 3 weeks as the results will probably decide which will be the direction of the stock for the coming months if we stay around this level until then. Bad earnings could result in a slow decline towards the $114 level, positive earnings could propel the stock towards $220.

If we take a look at the market maker expected move ((MMEM)) for ENPH on the 28th of July (closest option expiry after earnings) they are currently expecting a move of $21.8. This would mean a close of around $139.50 or around $183.18 is currently expected by the market makers. However, keep in mind that this will fluctuate and we are still some time away from the actual earnings.

Conclusion:

In conclusion, Enphase Energy currently provides an interesting buying opportunity despite short-term headwinds and weaker-than-expected guidance. The company operates in the rapidly growing renewable energy sector, with solar energy expected to witness substantial expansion in the coming years. With Enphase Energy being one of the leaders in the space, they will be one of the main beneficiaries of investments in solar energy.

Although the days of exponential growth might be behind them, Enphase continues to demonstrate impressive YoY growth and solid gross margins. In addition, technological advancements will continue to lower the cost of equipment.

Enphase currently trades at historically low levels, presenting an attractive entry point for potential investors. Even when compared to big tech companies, ENPH currently seems to be at an attractive valuation. A small investment in this high-growth company in an exciting sector might be able to generate significant returns in the future.

Considering Enphase's track record of growing FCF and revenues, the company seems well-positioned for future success. Despite the current headwinds, we believe ENPH is a buy at the current valuation for the long term in the attractive sector of renewable energy.

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