The solar industry has been in growth mode since the first viable commercial solar panel was invented in 1954, with the market reaching $211 billion in 2022. The first company to successfully commercialize the solar microinverter, which converts the direct current power generated by a solar panel into grid-compatible alternating current, was Enphase Energy Inc. (ENPH, Financial).
The company is a global energy technology company and the world’s leading supplier of microinverter-based solar-plus-storage systems. Its semiconductor-based microinverter system converts energy at the individual solar module level and brings a system-based high-technology approach to solar energy generation, storage, control and management. The company sells its solutions to solar distributors, large installers, original equipment manufacturers, strategic partners and homeowners.
Since inception, the company has shipped approximately 68 million microinverters and over 3.5 million Enphase-based systems have been installed in over 100 countries.
The company was incorporated in 2006 and currently has a market capitalization of $16.2 billion.
Microinverter
What is a microinverter exactly? Microinverters are inverters installed at the individual solar panel site, which is different from centralized string inverters where there is typically one inverter for the whole solar system. Most solar panel systems around today with microinverters include one microinverter at every panel.
Because each microinverter operates at the panel site independently of the other inverters in the system, microinverters are classified as module-level power electronics. MLPEs are typically the best option for large-scale complicated solar installations or those with marginal shading. With legacy string inverter technology, panels only can produce electricity at the level of the lowest-performing panel on the same string. Microinverters solve this problem because panels have their own inverter, so each solar panel will continue performing efficiently even if one panel in the system is not producing as much electricity as the others.
The size of each microinverter is dependent on the size of the panel and the amount of electricity it is capable of producing, which is a factor of geography, direction, angle tilt and other elements. If a solar panel produces more electricity than its microinverter can convert at a given moment, “clipping” occurs, which results in power losses.
Competition
The company's major competitors include SolarEdge Technologies Inc. (SEDG, Financial), Advanced Energy Industries Inc. (AEIS, Financial), SMA Solar Technology (SMTGF, Financial), Tesla (TSLA, Financial), Advanced Energy Industries, CyboEnergy, Chilicon Power, Apparent and others. The market size for microinverters is approximately $3 billion and is expected to grow to $5.3 billion by 2028.
Recent financial results
The company reported second-quarter earnings on July 17, which continued to show impressive revenue growth. Revenue increased 34% to $711.1 million compared to the prior-year period. The company shipped 5,198,441 microinverters, which is approximately 2,121.3 megawatts DC, and 82.3 megawatt hours of IQ Batteries.
The GAAP gross margin improved to 45.5% from the year-ago period and the non-GAAP margin improved to 46.2% compared to 42.2% in the second quarter of 2022. Operating income increased 81.1% to $170.3 compared to $94.0 million.
Operating cash flow was $269.3 million and with only $44 million in capital expenditures, free cash flow was $225.2 million. The company maintains a strong balance sheet with cash and marketable securities of $1.8 billion and total debt was $1.94 billion as of the end of the quarter.
Valuation
The company provided guidance for the third quarter, but not for the whole year. Consensus analyst estimates for 2023 are $5.04 and for 2024 the estimate jumps to $6.47. However, those are non-GAAP numbers. GAAP earnings per share estimates for 2023 are closer to $3.43, which puts the company selling at 23.7 times non-GAAP earnings and 34.8 times GAAP earnings. The enterprise value/Ebitda ratio is approximately 18 based on 2023 Ebitda estimates.
The GuruFocus discounted cash flow calculator creates a value of $126 per share when using $5.04 as the earnings starting point and a 15% 10-year growth rate. Using forward earnings estimates of $6.47 creates a more reasonable undervalued situation with a price target of $162.
There are 24 Wall Street analysts that cover the company with an average price target of $186.77, which includes a high target of $262 and a low target of $114. There are currently 17 buy ratings, six hold ratings and one sell rating.
Estimated free cash flow in 2023 is approximately $690 million, which on a market cap of $16.2 billion is a free cash flow yield of 4.25%. This was traditionally a nice return in the era of zero interest rates, but now investors can get 5.54% on a one-year risk-free Treasury and 4.55% on a 10-year Treasury.
The company does not pay a dividend but repurchased 1.25 million shares of common stock in the second quarter at an average price of $159.43 for a total of approximately $200 million. This completed the $500 million share repurchase program authorized in May 2021.
Guru trades
Gurus who have purchased Enphase stock recently include Ray Dalio (Trades, Portfolio)'s Bridgewater Associates and Jeremy Grantham (Trades, Portfolio). Investors have sold out of or reduced their positions include Ken Fisher (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Summary
Enphase is a popular stock with investors, but is still facing certain headwinds. These include a new net metering program in California, which could negatively impact solar installations. Under this program, the value of solar energy credits given to new customers decreases by 75%.
High interest rates are also creating a problem as most consumers or businesses who install solar systems use borrowed funds. The one offset to higher interest rates is that solar panel prices have been decreasing in recent years, which helps with the overall costs.
Overall, there are still tailwinds from the expected growth of solar installations around the world, which could create long-term demand microinverters. However, at some point in the future, there will be a saturation point as the number of consumers who want solar power already have installations and the market demand will slow down.
The company still appears to be overvalued and for investors, it may be best to wait until Enphase becomes a value stock.
