Enphase Energy (NASDAQ: ENPH), a top provider of residential solar energy solutions, has experienced a shocking stock drop of 70% over the past year, with the current trading price at $41. This notable decline brings the company’s valuation to its lowest point in more than five years. The main cause for this ongoing downturn is the weakened demand throughout the residential solar sector, as elevated interest rates have led to customer reluctance in making significant solar investments. See – Why ENPH Stock Has Crashed 70%? – for additional information.
This situation prompts an essential inquiry for investors: Is ENPH stock a worthwhile purchase following such a considerable drop? This steep decrease for Enphase Energy stands out especially compared to its competitors in the competitive solar energy field. In the last twelve months, Sunrun has decreased by 40%, while SolarEdge Technologies has dropped by 60%. Even First Solar, which emphasizes utility-scale power plants over residential solar, has seen a 40% decline in stock during the same timeframe. It is precisely this downside risk, contrasted with the potential upside opportunities we analyzed – at scale, within the formation of the Trefis High Quality (HQ) strategy that has achieved over 91% returns since its inception, outperforming the S&P 500. Additionally, see – 35% Downside For DocuSign Stock?
Valuation Still Isn’t Cheap
Enphase Energy’s valuation presents a mixed perspective in comparison to the S&P 500. Its Price-to-Sales (P/S) ratio of 3.8 is marginally higher than the S&P 500’s 3.0, indicating a premium on sales. Likewise, its Price-to-Earnings (P/E) ratio of 36.7 is significantly above the S&P 500’s 26.4. However, ENPH’s Price-to-Free Cash Flow (P/FCF) ratio stands at a favorable 10.6, considerably lower than the S&P 500’s 20.5, showcasing strong cash generation relative to its market price. Explore our dashboard on Enphase Energy’s Valuation Ratios for further insights.
Revenue Growth Hasn’t Been Great
Enphase Energy’s revenue growth reveals recent challenges despite a solid long-term average. In the past three years, its top line increased at an average rate of 6.5%, beating the S&P 500’s 5.5%. However, revenues have declined by 22.2% from $1.8 billion to $1.4 billion over the last 12 months, contrasting with the growth seen in the S&P 500. On a positive note, quarterly revenues recently soared by 35.2% to $356 million from $263 million a year prior, greatly outperforming the S&P 500’s 4.8% growth.
Average Profitability
Enphase Energy’s profitability metrics show a mix of results. Its Operating Income over the last four quarters was $153 million, leading to a low Operating Margin of 10.7% compared to the S&P 500’s 13.2%. Net Income for the same period was $148 million, resulting in a moderate Net Income Margin of 10.4%, slightly lower than the S&P 500’s 11.6%. In contrast, the company shows strong cash flow generation, with an Operating Cash Flow (OCF) of $513 million, leading to a high OCF Margin of 36.0%, markedly surpassing the S&P 500’s 14.9%.
Strong Financial Stability
Enphase Energy’s balance sheet appears robust. Its Debt-to-Equity Ratio stands at 22.1% (with debt of $1.2 billion compared to a market cap of $5.4 billion), which is on par with the S&P 500’s 19.9%. Importantly, the company sustains a very strong financial position with a Cash-to-Assets Ratio of 47.2% ($1.5 billion in cash out of $3.1 billion in total assets), far exceeding the S&P 500’s 13.8%.
Poor Downturn Resilience
ENPH stock has exhibited lower resilience during market downturns compared to the S&P 500.
- Inflation Shock (2022): ENPH fell 77.5% from its peak while the S&P 500 dropped 25.4%. The stock has yet to regain its pre-crisis peak.
- COVID-19 Pandemic (2020): ENPH declined by 59.4% during the pandemic, considerably more than the S&P 500’s 33.9% reduction. Nonetheless, it fully recovered to its pre-crisis peak relatively swiftly.
The Verdict
Enphase Energy displays strong cash flow generation and a solid financial position with sufficient cash reserves. While its current valuation metrics are generally elevated compared to the broader market on both a sales and earnings basis, the stock seems attractive when assessed against its historical averages. At $41, ENPH trades at 3.8 times trailing revenues, significantly lower than its two-year average Price-to-Sales (P/S) ratio of 7.3 times. Investors have significantly penalized the stock due to a considerable revenue contraction last year, despite robust recent quarterly growth. A principal worry for investors remains the stock’s marked underperformance and sluggish recovery compared to the S&P 500 during recent market downturns.
Looking forward, a projected drop in interest rates should make financing for residential solar more appealing. In the short term, the company’s strategy to relocate its solar battery production from China to the U.S. to lessen tariff impacts is likely to influence profitability. Ultimately, a revival in residential solar demand and the stabilization of the tariff situation are vital for a better performance by Enphase Energy. The scenario with Enphase Energy underscores the risks of making substantial investments in a single stock. Creating a diversified portfolio is critical for balancing risk and reward. For instance, the Trefis High Quality (HQ) strategy, which focuses on balancing risk and reward, has consistently outperformed the S&P 500, Nasdaq, and Russell 2000 since its inception.