Based in Fremont, Calif., Enphase Energy, Inc. (ENPH) is a manufacturer and seller of home energy solutions and semiconductor-based microinverters for the solar photovoltaic industry in the United States and internationally. ENPH’s stock price has advanced  299% over the past year because of solid investments made in the solar sector and optimism surrounding the clean and carbon-free energy drive around the globe.

However, shares of ENPH have declined 13.5% year-to-date and 7.8% over the past month.

While the clean energy industry gained traction in 2020 and was one of the top performing industries, its long-term outlook is  uncertain. Although ENPH’s strategic partnership could help it expand its solar business further, the company is trading at a significantly high valuation, which could result in the stock turning investors off in the near term.

Here is what we think could influence the performance of ENPH in the coming months:

Mixed Outlook for Renewable Energy Sector

The renewable energy sector generated impressive  growth in 2020, bolstered by higher corporate investments and a rapid shift globally toward a zero-carbon environment. President Joe Biden’s prioritization  of clean energy across the economy to tackle climate change has given a massive boost to the solar energy industry.

However, higher solar panel installation and maintenance costs lead to reduced capacity growth, marring the industry’s prospects.  Also, with the federal government still focusing on the economic disruption caused by the pandemic, it could be some time before funding is channeled into the clean energy industry. Thus, we believe solar PV producer ENPH’s near-term growth prospects are  uncertain.

Partnership with Rubicon Energy Could Drive Growth

On March 29, 2021, ENPH inked a strategic agreement with Rubicon Energy to provide Enphase IQ microinverters for photovoltaic applications to residential and commercial installers in the South African market. ENPH’s diverse product offerings could be well-suited to the fast-growing South African solar market requirements and provide the company a profitable growth opportunity.

Mixed Financials

ENPH’s net revenue increased 26.1% year-over-year to $264.84 million in the fourth quarter ended December 31, 2020. Its gross profit grew 56.6% from its  year-ago value to $121.94 million. However, the company’s net income declined 37.4% year-over-year to $72.99 million, while its EPS declined 40% from the prior-year quarter to $0.57. Its operating expenses were $42.82 million, representing a year-over-year increase of 28.1%. And ENPH’s net cash provided by operating activities declined 17.7% from the year-ago value to $84.18 million.

Premium Valuation

In terms of trailing-12-month EV/Sales, ENPH is currently trading at 26.08x, 454.7% higher than the industry average 4.70x. ENPH’s trailing-12-month Price-to-Book ratio of 40.33x is 694.5% higher than the industry average 5.08x. Also, the company’s forward Price/Cash flow of 76.51x is 231.3% higher than the industry average 23.09x.

Consensus Price Target and Rating Reflects Potential Upside

Currently trading at $151.87, Wall Street analysts expect the stock to hit $214 in the near term, which indicates a potential upside of 40.9%.

ENPH has an average broker rating of 1.65, which indicates favorable analyst sentiment. Of the 16 Wall Street analysts that rated the stock, two rated it Strong Buy and 10 rated it Buy.

POWR Ratings Indicate Uncertain Prospects

ENPH has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. ENPH has a Value Grade of D, given the stock’s stretched valuation.

In terms of Growth Grade, ENPH has a C, in sync with the company’s inadequate financial performance.

But it has an A grade for Momentum, which is consistent with the stock’s gains over the past year.

Click here to see the additional POWR Ratings for ENPH (Stability, Sentiment, and Quality).

ENPH is ranked #2 of 20 stocks in the F-rated Solar industry.

There are several other top-rated stocks in the same industry, click here to access them.

Bottom Line

ENPH’s impressive price performance over the past year was underpinned by higher investments in the solar energy sector as well as the federal government’s expected spending on renewable energy projects. However, its shares have retreated  so far this year, and may retreat further given the stock’s overvaluation and the fuzzy near-term growth prospects of the renewable energy industry.

ENPH shares were trading at $150.78 per share on Tuesday afternoon, down $1.09 (-0.72%). Year-to-date, ENPH has declined -14.07%, versus a 10.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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