Founded in 2006, Enphase Energy (ENPH.US) transformed the solar industry with revolutionary microinverter technology that converts sunlight into a safe, reliable, resilient, and scalable power source. Today, their smart microinverters work with virtually all existing solar panels and, combined with their smart battery technology, design one of the best performing clean power systems in the industry.
Enphase has flown under the radar in investing against other stocks like First Solar (FSLR.US), but in the industrial arena its sheer dominance in the industry and its high-quality microinverters set the standard. And within its benchmark, the S&P 500, it has performed extraordinary.
Quarterly Results
Enphase delivered another record quarter
With revenue of $634.7 million, which was a 20% increase compared to 2Q22 and an 80% increase year-over-year. This means that Enphase's growth accelerated compared to 2Q22 and this is impressive when you take into account difficult macroeconomic conditions, such as high inflation and recessionary spending. What's more, Enphase modified to increase margins, despite inflation, to an impressive 42.9%. Enphase is a company that grows 80% year-on-year while increasing margins by 42.9%. Few companies can say the same.
Operating income was $194 million and EPS was $1.25. Free cash flow reached $179.1 million. Enphase shipped more than 4.3 million microinverters during the quarter and 133.6 MWh of intelligent (IQ) batteries.
It was a great exercise for Enphase to show the financial results. The company saw continued strength in Europe as all countries tried to move away from reliance on fossil fuels. Growth in Europe was 70% qoq, which is impressive. The increase in margins is primarily due to a better sales mix, as Enphase asked to sell more of its more advanced IQ8 microinverter. Which constitutes 47% of the total number of microinverters sent.
On balance sheet, Enphase ended the third quarter with $1.420 million in total cash. Which is an increase from the $1.250 million with which they entered the third quarter.
The outlook for the fourth quarter released by Enphase was also above analyst estimates. Enphase expects revenue of between $680 and $720 million with gross margins between 40% and 43%. This means that Enphase expects revenue to increase 10% qoq at the midpoint. This is a slowdown compared to 20% last quarter. However, everything indicates that the company can once again exceed revenues where the new target stands at $750 million estimated by the market. Or what is the same, an increase of 15% quarterly.
Business update
Enphase provided us with a new investor presentation back in October, so it's interesting to see if there are any updates:
Their product offering continues to expand and Enphase already offers a very strong product ecosystem. Enphase's flagship product is its microinverter and the ecosystem it builds around it. Enphase has a very strong position in the microinverter market, but it's not the most high-tech industry, so it's important for Enphase to create a competitive advantage. It does this by creating many advantages for Enphase Microinverters. Here's a little explanation of microinverters:
A microinverter converts direct current power generated by a solar panel into grid-compatible alternating current for use or export. So why would consumers pay more for a microinverter than for a central inverter integrated into their solar system? Well, if a solar panel with a built-in central inverter fails, solar production stops completely. With only one microinverter per solar module, solar production continues to work even if one microinverter stops working.
Enphase Microinverters offer the opportunity to control them via the telephone. With the same app, users can control all of the Enphase equipment within their system, such as IQ batteries or EV chargers. The image below illustrates what the perfect Enphase ecosystem would look like.
By giving your customers the option to bundle their solar systems with additional Enphase equipment and controlling it all through one app, you increase the value of your competitive advantage. In addition to this, the option of more equipment increases the possibilities of additional sale and, therefore, the ability to earn more dollars for each microinverter sold.
Enphase is less well known, but what if we compare it to First Solar?
- For one, Enphase (ENPH.US) continues to consolidate its offerings beyond a conventional microinverter/battery company to become a full-charge and renewable energy management company for electric vehicles. Its expansion into the EU market will help diversify some of the bubble risks, given the massive push for electrification in the EV and solar markets.
- On the other hand, First Solar (FSLR.US) remains speculative despite its record arrears through 2027, due to the obvious optimism surrounding the IRA and California's solar program. In addition to continued improvements in its top and bottom line growth, extremely wealthy valuations limit its upside potential during these uncertain economic conditions.
Both listed companies have been handsomely rewarded so far, due to the huge boost from the Inflation Reduction Act and the upbeat development in California's Solar Incentive Program. And no surprise, as the global renewable energy market is expected to expand aggressively to $1.99 trillion in value by 2030, at a CAGR of 8.6%. Global demand for solar power is also expected to grow massively from one terawatt in April 2022 to 2.3 terawatts by 2025, with China accounting for about 30% of that demand, while the EU and US doubled to 2.86% and 2.95%, respectively.
It is not surprising, then, that ENPH does not experience a slowdown in global demand, with healthy reserves through 1Q'23 despite rising inflationary pressures. For its part, FSLR in its latest report reported even more impressive delays to 2027, with a whopping 31.15% qoq expansion to 58.1GW in the latest quarter, with total booking opportunities up to 114GW. These data show that there is absolutely no demand destruction.
Market has optimistically rewarded ENPH and FSLR with massive simmering growth
ENPH: Projected Revenues, Net Profit (in billions of $)%, EBIT% and EPS, FCF%
Due to its excellent last quarterly report, ENPH has great resilience. Therefore, it is only natural that the company is expected to deliver growth at its improved ends of 9.06% and 16.32% through fiscal year 2025 based on market consensus. Notably, market analysts project the company to achieve impressive year-over-year revenue growth of 35.93% despite the potential recession in 2023, while expanding its profitability by 22.93%.
Through GreenCom's recent acquisition of ENPH and ClipperCreek, there is no doubt that the company will consolidate its offering in renewables and offer a complete system for home energy management, EV chargers, IQ8 microinverters, IQ batteries and solar panels. from third parties.
We expect this market segment to perform extraordinarily well, given early promising signs of revenue growth of 70% qoq and 136% yoy in the region. Although the US still accounts for 70.13% of ENPH revenue according to their latest report, the former is likely to be overtaken by the EU as the EU government hopes to rapidly expand 1.2 EV adoption million in 2020 to 30 million by 2030, while increasing the total solar installation from 165 GW to 1 TW in the same period.
FSLR: Projected Revenue, Net Profit (in billions of dollars)%, EBIT% and EPS, FCF%
Meanwhile, market analysts have also improved the FSLR data, with notable revenue and profit expansion of 11.29% and 17.64%, since October 2022. The company is now expected to grow at a revenue CAGR most ambitious of 17.2% and earnings per share (CAGR) of 54.1%, against the extreme levels of the pandemic of -2.3% and 48.2%, respectively. Its profitability expansion is also impressive, given projected EBIT margins of 37.5%, net revenue margins of 33.8%, and FCF margins of 29% for fiscal 2025.
Naturally, this is assuming there are no order cancellations in the coming years, as Taiwan Semiconductor Manufacturing Company Limited (TSM.US) has currently experienced due to fears of a peak recession and falling semiconductor chip inventories. It is important to note that the energy industry is also a highly cyclical industry, just like the semiconductor, housing, or shipping markets. Assuming the renewable energy sector takes on the same nature due to the massive demand and supply inflow, we can see some of this optimism easily digested before the final delivery of FSLR in 2027. The last three end markets are already in their cycles. declines after pandemic highs, leading to negative forward guidance and year-to-date inventory losses.
We are already starting to see some early signs of this happening, with many Chinese solar panel producers such as Daqo New Energy, Tongwei and GCL aggressively hoping to produce up to 1,010 Tons of polysilicon by 2024 (or estimated equivalent). of 336 GW capacity, based on 1.2 kg per 400 W solar panel). That would indicate a massive increase of up to 353.14% in the next two years, which could trigger an oversupply in the solar market, since it is incremental to the total production of domestic supply of more than 3 Tons. That event would definitely curb solar prices and thus a slowdown in companies' Capex growth going forward.
On the other hand, with the solar tariff still in place, Chinese-made solar panels are not welcome in the US and, soon, the EU. Therefore, some of these headwinds could be alleviated. We'll see, as FSLR only expects to deliver 10.7 GW annual production capacity by 2026 within the US and another 10 GW internationally by 2025. These numbers seem reasonably cautious, indicating prudent expansion of the public administration despite the large amount of record income so far. Perhaps this is due to its massive 88% concentration of business in the US, to take full advantage of the Reduction of Inflation Act.
So, in what situation are the actions of ENPH and FSLR?
ENPH and FSLR Valuations YTD EV/Revenue and PER
As a result, it is not surprising that both ENPH and FSLR are now trading at a significant premium. The former is currently at an EV/Revenue for the next 12 months of 14.71x and a PER for the same period of 63.77x, approaching its 2022 maximum of 16.51x and 71.87x, respectively. At $312.40, the stock is obviously closer to its 52-week high of $324.84 and at a large 282.57% premium from its 52-week low of $113.40.
If we think that these metrics are extraordinary, FSLR is even more impressive, trading at EV/Revenues for the next 12 months of 4.78x and PER for the same period of 50.32x. These numbers represent a record jump from their previous normal valuations of 1.09x and 9.75x, respectively, prior to these hyper levels we saw during the pandemic. FSLR had posted an extreme 218.42% rally since its Q2 report on July 27, 2022. Therefore, it maxed out its potential, given the minimal 1.57% upside from the consensus price target. From the market.
ENPH & FSLR YTD Stock Price
Needless to say, both stocks are offering a huge tsunami of confidence, especially after October's upbeat CPI. 75.8% of market analysts expect the Fed to change, with a 50 basis point hike in December, similar to the Bank of Canada's recent dovishness. Assuming this is the case, we are likely to see the broader market improve its expectations on recession fears, despite the terminal interest rate being above 6%. Naturally, it remains to be seen if these sentiments can hold through the rest of the rallies into 2023, although we are less hopeful given the extremely inflated valuation limiting its upside potential. Therefore, digestion will come sooner or later.
For those who have ENPH or FSLR in their portfolio, the market values them as "hold" for those who remain convinced of their potential in the next decade. If not, some may want to wipe out some of the gains, as Wall Street will quickly punish once growth slows and sentiment normalizes. The same has been seen for high-growth tech stocks that were once beloved by market analysts and are now the big ones disowned due to slowing growth at the top and bottom end of their valuations during large corrections across the board. the market recently.
However, those who consider adding ENPH and FSLR now will likely benefit from underperformance in the long run, due to the minimal margin of safety. Therefore, patience will definitely pay off, with the price target being $200 for ENPH and $100 for FSLR, thus avoiding jumping on the current rally bandwagon.
Conclusion
Enphase posted an impressive third quarter with growth of 80% year-over-year and 20% quarterly. Enphase managed to improve its margins despite inflationary pressure which not many companies can tell right now. The 70% sequential growth in Europe proves once again that the old continent is a great growth opportunity for Enphase, since it is increasing its market share there. It is already the dominant player in countries like the Netherlands and Germany. The outlook for the fourth quarter projects another quarter of strong growth and is above analysts' expectations.
Enphase is a well-crafted and well-managed business with strong long-term growth potential driven by the shift to green energy, and solar power in particular. Enphase continues to expand the business with new products, new acquisitions, and partnerships. However, the main concern is a slowdown in Europe as a result of lower consumer spending and a possible deep recession. Now, with 70% quarter-on-quarter growth, we can easily say that there is still room for growth to slow in Europe and remain strong. In the long term, no other material risks are seen for Enphase as the company has remarkable management that is coping well with the current difficult environment. Enphase is extremely well positioned and Management is expanding the business in the right directions.
The biggest problem for Enphase is its valuation. The company is still valued at a PER of 69x. This is because the consensus estimates were revised upwards and therefore its valuation improved. Analysts are projecting a significant slowdown by 2023 to just 23% revenue growth and that's fair, but you also have to consider that growth will remain at least above 30%. This would also significantly lower the valuation. However, this will depend on the severity of a potential downturn, as Enphase will not be completely immune.
Enphase is not cheap nor is it cheap, that's a fact. Therefore, depending on whether it is already in the portfolio or whether it is intended to be incorporated, it will depend, as we have commented before, on the basis of the target prices, of the investor profile.
Dario Garcia, EFA
XTB Spain
