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Why Is Everyone Talking About Enphase Energy Stock?

Maxx Chatsko, The Motley Fool

As Enphase Energy (NASDAQ: ENPH) president and CEO Badri Kothandaraman wrote in a letter to shareholders in March 2019, the company faced "an existential threat in 2016." Luckily for the business and its shareholders, management was able to secure new funding and start working on an ambitious turnaround plan. It took all of the next two years, but the company proved successful. An operating loss of $39 million in 2017 swung to an operating profit of $1.6 million in 2018.

And that was only the beginning. The provider of solar energy solutions generated operating income of $7.1 million in the first quarter of 2019, and it still hasn't reached its targeted operating margin. That realization has kicked off a wave of enthusiasm for the business, as evidenced by a year-to-date gain of 222% for the stock. Should investors feel confident that the progress will continue?

A potted plant growing in the shape of an arrow point higher.

Image source: Getty Images.

Strong growth that's just getting started

Enphase Energy successfully righted the ship by managing operating costs, paying off suffocating debt, and continuously improving its technology platform. The latter has proven crucial. The company's microinverters are a core component of stand-alone and solar module-integrated power optimizers. Considering the latest-generation IQ 7 microinverter comprised 94% of all shipments in Q1 2019, and that the business has faced component shortages in recent quarters, it's obvious customers across the solar power industry are gobbling up the company's products.

That trend appears likely to continue. Enphase Energy's microinverters are built on semiconductor-based Application Specific Integrated Circuits (ASICs), similar to those powering the Internet of Things, blockchain technologies, and data centers. The reliance on ASICs allows microinverters to become smaller, more powerful, and less complex over time. That should help the company keep pace with the solar industry's fast-moving technology curve without sacrificing margins.

For instance, while the IQ 7 microinverter has 3.8 million logic gates, the IQ 8 microinverter in development boasts 5 million, a 31% increase. That allows the same amount of power in a smaller package, which can reduce the number of components required and also the risks of component shortages. It also allows for more power in the same footprint, which opens new possibilities in off-grid applications. Indeed, the IQ 8 will prove critical to Enphase Energy's planned portfolio of integrated energy storage products and its next-generation of power optimizers. 

Technology evolution should keep the company's growth humming along. Enphase Energy reported Q1 2019 revenue of $100 million, marking a 43% increase year over year. It generated gross margin and operating margin of 33% and 7%, respectively. And all this comes at just the right time for a booming global solar industry. Solar power accounted for over 2% of American electricity generation in 2018 -- that may not sound like much, but it's on pace to reach at least 10% by 2030, and possibly much more.

A person walking along a rooftop solar installation.

Image source: Getty Images.

A turnaround success story

Enphase Energy teed up a turnaround plan in 2016, then proceeded to knock it out of the park. The business is now comfortably profitable and positioned to tap into several lucrative growth opportunities. Management's new focus will be on increasing profitability and reinforcing the balance sheet in a shareholder-friendly manner, which is possible with existing and predicted cash flows.

While the process will take time, it should smooth out some unusual disparities in stock valuation metrics. For instance, shares of Enphase Energy trade at a PEG ratio of just 0.43 and 28 times future earnings -- both pretty attractive. However, shares also trade at 118 times book value and an enterprise value to EBITDA ratio of 61 -- both pretty horrendous.

Nonetheless, investors with a long-term mindset might be willing to start or add to positions at the current $1.6 billion market valuation.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.