Solar stocks had a scorching run in 2020, with the Enphase Energy [ENPH] share price soaring 571.5%. However, the Enphase Energy share price hasn’t continued its blistering run so far in 2021, falling 8.7% to $160.09 on 13 September.
Despite having cooled down by 30.1% from its 52-week high of $229.04 set on 10 February, the Enphase Energy share price is up 47% from its year-to-date low of $108.88, which it fell to back in May. In the past 12 months, the Enphase Energy share price has been up a blinding 625%.
Given that the Enphase Energy share price is a key holding in clean and renewable energy funds, most funds have seen disappointing performances in the year so far. Indeed, the stock is the top holding in the Invesco Solar ETF [TAN], with a weighting of 10.40%, but the fund is down 17.3% in the year to date (through 13 September). The stock is also in the top 10 holdings of the Global X CleanTech ETF [CTEC], which has fallen 13.7% in the same period.
How does the company stand out compared to its solar peers to make it a top holding in these funds, and what’s the long-term growth story that could propel the Enphase Energy share price to new heights?
A microinverter edge in the booming solar market
Solar stocks are increasingly popular buys as investors and traders look to play the clean energy revolution. The global solar energy market is predicted to be worth $223.3m in 2026, up from $52.5m in 2018.
The recent performance of the Enphase Energy share price has been hot, but it isn’t necessarily a case of a stock flying too close to the sun. The company is expected to be a long-term beneficiary of US president Joe Biden’s recently revealed blueprint to use solar energy to supply 40% of the US electricity to homes by 2035.
Valuation of the global solar energy market by 2026
Enphase Energy designs and manufactures software-driven energy solutions, including energy storage and smart monitoring. Its focus is largely on home energy management, although it also provides commercial solutions.
The company is regarded as one of the world leaders in microinverters, which are small devices fitted underneath solar panels that convert the direct current produced by the panels into the alternating current used by grids and homes. Enphase Energy sold 32 million microinverters in 2020. Indeed, its microinverters are superior to those manufactured by SolarEdge [SEDG], according to comparisons of the two.
An expanding manufacturing supply chain
For the three months to the end of June, Enphase Energy brought in revenue of $316m, up 151% on the $126m reported for the year-ago quarter. US sales accounted for 81% of total sales, and international sales made up 19% of the mix. The gross profit margin rose from $270m to $470m in the second quarter of 2021 and has been rising steadily in recent quarters.
Much of this growth is likely priced into the stock. As of the close on 10 September, the Enphase Energy share price is trading at 45.2 times expected 2022 fiscal year earnings and 68.8 times expected sales for that year.
When it comes to the long-term outlook, Enphase Energy may look to profit from president Biden’s solar ambitions and the US looking to improve its domestic clean energy supply chain by manufacturing there. Currently, the company manufactures in India and Mexico.
“If there is anybody capable [of getting] something up and running pretty quickly, it’s probably going to be us. We know how to establish control manufacturing very quickly” - Raghu Belur, chief product officer
“If there is anybody capable [of getting] something up and running pretty quickly, it’s probably going to be us,” Raghu Belur, chief product officer, said on the second quarter earnings call. “We know how to establish control manufacturing very quickly.”
Should Enphase Energy choose to expand manufacturing into the US, it has a strong management team to make it work. Between them, its executives have several decades of experience working across the clean energy and semiconductor industries.
The current CEO, Badri Kothandaraman, took over from founding board member Paul Nahi in 2017. Kothandaraman was appointed for his proven track record of growth and operational excellence.
The management team has been described by Seeking Alpha as “cautious and assured”.
Rising rooftop installations and rapid storage growth
Analysts are generally bullish on the stock with 18 buys, 10 holds, and no sells, based on ratings compiled by MarketBeat. The Enphase Energy share price has a consensus target of $184.04, which implies an upside of 16.32% from its 10 September closing price.
Morningstar analyst Brett Castelli is expecting Enphase Energy’s revenue to grow by 35% over the next five years, powered by rising rooftop installations and rapid storage growth in its primary target market: US residential.
Wolfe Research analyst Steve Fleishman initiated his coverage of the stock on 31 August with an outperform rating. Fleishman commented in a note to clients seen by The Fly that Enphase Energy offers a “differentiated” microinverter product, and the company is a “great way to play” the “thematic tailwinds” presented by solar energy.