Market Commentary: 1 Solar Stock You Cannot Afford to Miss

What a horrific year Enphase Energy has had, plunging 54% for the year and still there a few months to go. For a company that’s virtually synonymous with solar technology, what has caused this big crash in an industry that has so many tailwinds?

After all, Enphase has generated over $860 million in free cash flow over the past twelve months and it’s attracted interest from titans of Silicon Valley like TJ Rodgers.

Key Points

• Despite a bullish $175 valuation from our discounted cash flow analysis, analysts are divided, mainly due to concerns about margin compression.
• Enphase has historically shown consistent YoY revenue growth and has generated $865 million in free cash flow.
• With only 5% U.S. residential market penetration, Enphase has significant growth potential.

Does Wall Street Love or Hate Enphase?

Bank of America recently downgraded ENPH stock and lowered its price target to $102, a price hit in after-hours trading on October 19. Conversely, firms like Piper Sandler and BMO Capital Markets maintain “hold” or “buy” ratings even after slashing price targets.

When we ran a discounted cash flow analysis forecast, we arrived at a pretty bullish $175 per share figure for fair value. That’s an astonishing 75% higher than where the stock traded when it was downgraded by Scotiabank to Sector Perform with a $140 price target. The concerns stemmed from increased risks of margin compression.

Financial Track Record Has Been Extraordinary

When we looked at the financial statements, they were downright impressive. In 11 of the past 12 quarters revenues have grown year over year.

Better still, the only time when they didn’t rise on an annual basis was 12 quarters ago. So the consistency in the top line has been exceptional, and it’s translated to $865 million in free cash flow. That’s not a sign of a company in distress but rather it’s an indication of a management team that knows how to manage costs effectively.

So, why has the stock sold off so horribly this year?

Analysts seem to be worried that the 40% plus gross margins will be in jeopardy, even though it must be highlighted that the company has consistently managed to generate positive operating income, and for the most part it’s grown quarter after quarter over the past 2+ years.

Solar’s Growing Opportunity

Enphase’s management noted that residential solar penetration in the U.S. stands at just 5%. While some see this as a drawback, others could interpret it as an enormous market opportunity waiting to be tapped. The evolving landscape of green energy offers untapped markets and the prospect of robust long-term growth.

According to industry testimonials, the company’s products have integrated well into the broader ecosystem of solar products. For example, one popular charger allows homeowners to schedule charge times, manually start and stop charging, and monitor energy usage via the Enphase App on mobile devices. Such integration adds layers of utility and value to their offerings, making them more appealing to a broader range of consumers.

Enphase isn’t solely reliant on the U.S. market, either, but has made significant strides overseas. The diversification into international markets offers a cushion against domestic economic downturns and provides a more extensive customer base to mitigate risk of economic strain.

The Bottom Line

On the one hand, Enphase is a company that analysts can’t seem to agree upon. On the other hand, it’s a cash-generating machine in a sector with ample room for growth and global reach.

While Wall Street remains divided on Enphase, the company’s history of rising revenues, operating income in the black, and strong free cash flow combine to make it a highly attractive solar play for those who can stomach the wild price swings.