ENPH: Enphase Energy vs. First Solar: Which Stock is a Better Buy?

With increasing climate change awareness across the globe, solar energy has emerged as an efficient alternative. This has been increasing the popularity of solar photovoltaic companies Enphase Energy, Inc. (ENPH) and First Solar, Inc. (FSLR). With a similar product and clientele base, ENPH and FSLR have turned out to be two of the leading contenders in the solar energy industry. However, ENPH has a higher market valuation compared to FSLR.

Both companies have generated significant returns over the past five months. However, ENPH is the clear winner with a 2,670.5% gain versus FSLR’s 71.5% gain. In terms of year-to-date performance as well, ENPH’s 292.3% return beats FSLR’s 56.3%. However, FSLR’s 33% gain over the past month surpasses ENPH’s 26.9% return. But which one is a better buy now? Let’s find out.

Latest Movements

ENPH started supplying Enphase IQ 7A microinverters to Australian and European markets from August 31^st. It partnered with G-Store in Australia for smooth delivery and installation of Enphase inverters across the country. In the European markets, ENPH partnered with three companies — Carbomat group, Libra Energy, and Solarclarity based in Belgium and Netherlands — for distribution and installation of Enphase IQ 7 across the two countries.

ENPH entered into a strategic partnership with Maxeon Solar technologies in July to develop seventh-generation factory integrated Enphase IQ microinverters. These products are expected to be launched by the fourth quarter for residential customers worldwide. Earlier this year, the company announced its expansion plan to Poland through a partnership with solar distributor SmartX Sp. z.o.o. It also partnered with SunCool Energy for distribution of Enphase Storage systems in south Florida.

On September 14^th, ENPH announced construction of a building-integrated photovoltaic commercial solar project in Minneapolis. This high profiled building is built to rely completely on solar energy, with an array of 112 solar modules and ENPH micro inverters.

On October 12^th, ENPH announced a partnership with Natura Living for development of commercial solar projects for PepsiCo Thailand. Under this agreement Natura Living installed a 60kW solar array with Enphase IQ 7 inverters in the PepsiCo building in Thailand.

On August 6^th, FSLR announced its commitment to power 100% of its global photovoltaic solar manufacturing operations renewable energy by 2028. It plans to transition its facilities located in the United States to carbon-free electricity by 2026. It launched the first known 141 MW utility scale solar facility, providing ancillary grid services commercially in Chile.

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Like ENPH, FSLR also branched out to the European markets this year. FSLR’s photovoltaic solar modules have been used to power the largest urban solar photovoltaic power plant in Europe, the Labarde Solar Power plant. The company has also powered six recent projects being developed by Vista Corporation.

On July 23^rd, FSLR entered into an agreement with Renewable Power Group of Goldman Sachs Asset Management to power American kings Solar project with FSLR’s series 6 photovoltaic modules. FSLR also sold its North American Operations and Maintenance Business to NovaSource Power Services. The company is currently offering senior notes to raise approximately $596.85 million in net proceeds.

Recent Financial Results

ENPH’s revenue increased 42.2% sequentially to $178.50 million in the third quarter that ended September 2020. Operating income rose 53.5% year-over-year to $51.76 million. Net income increased 26.6% to $39.36 million, while EPS grew 24% to $0.31. The company reported a record non-GAAP gross margin of 41% for this period.

FSLR’s net sales grew 69.6% year-over-year to $927.57 million in the third quarter that ended September 2020. Gross profit rose 111.8% from the year-ago value to $293.02 million, while net income increased 406.3% from the same period last year to $155.04 million. EPS rose 403.4% from the prior-year quarter to $1.46.

Thus, FSLR has an edge over ENPH here.

Past and Expected Financial Performance

ENPH’s revenue grew at a CAGR of 34.3% over the past three years, while EBITDA rose 106.1% year-over-year. Analysts expect ENPH’s EPS to rise 32.6% in the current year, and 45.2% next year. The consensus revenues estimate of $1.20 billion for 2021 indicates 59% improvement year-over-year.

On the other hand, FSLR’s revenue increased at a CAGR of 6.1% over the past three years, and EBITDA grew 366% year-over-year. Analysts expect the company’s EPS to rise 138.5% in the current year, and slightly next year. The consensus revenue estimate for 2021 indicates an 8.1% increase from the prior-year value.

Profitability

FLSR’s revenue is 4.86 times what ENPH generates. However, ENPH is more profitable with a gross margin of 42% compared to FSLR’s 24.4%.

Moreover, ENPH’s ROE and ROA of 62.5% and 11.8% compare favorably with FSLR’s 4.2% and 4.8%, respectively.

Valuation

In terms of trailing 12-month P/E, ENPH is currently trading at 79.96x, 80.1% more expensive than FSLR, which is currently trading at 44.40x. Also, ENPH has a higher valuation compared to FSLR in terms of Price/Sales (17.79x versus 2.82x) and EV/ Sales (17.65x versus 2.43x).

However, ENPH’s Price/ Cash flow ratio of 55.40x is 66.9% lower than FSLR’s 92.44x.

POWR Ratings

Both FSLR and ENPH are rated a “Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for both these stocks:

ENPH has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “C” for Industry Rank. It is currently ranked #2 out of 16 stocks in the Solar industry.

FLSR also holds an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “C” for Industry Rank. It is ranked #3 in the same industry.

The Winner

Being two of the biggest names in the solar energy space, betting on both FSLR and ENPH should help reap significant returns as the industry takes off in the upcoming years. However, FSLR has an upper hand over ENPH with respect to growth potential and analyst expectations, at a more affordable valuation. Moreover, EPNH’s quarterly financial metrics are relatively lower than FSLR’s.

With multiple expansion projects currently under development, FSLR has plenty of upside left, making it a more attractive investment bet here.

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ENPH shares were trading at $98.63 per share on Friday afternoon, down $3.88 (-3.78%). Year-to-date, ENPH has gained 277.46%, versus a 2.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...