Enphase Energy (NASDAQ: ENPH) gained nearly 30% in the trading session on May 1, 2019 after reporting its financial results for the first quarter. The company broke $100 million in product revenue for the first time in history, improved margins, greatly reduced debt, and saw a significant increase in operating income. So, the gains were definitely warranted.
However, with the climb in the market on May 1st, is there any more room for growth? In my opinion, the answer is yes. In fact, after digging into ENPH stock, I’ve found that it represents a very compelling long term growth opportunity. Let’s dig in:
What Is Enphase Energy
Enphase Energy is a technology company that’s focused on providing solutions for the solar power industry. The company’s claim to fame is their semiconductor-based microinverter system.
The system converts energy at the individual solar module level. The idea is to bring a system-based high-tech approach to solar energy generation, control and management.
The Unique approach taken by Enphase Energy helps to not only increase energy production and simplify design and installation, it improves system uptime and reliability. Moreover, the company’s microinverter system is known to reduce fire safety risks through a platform for intelligent energy management.
This unique approach to efficiency, safety and reliability has led to the company’s strong position in the space. In fact, Enphase Energy is considered to be the leading supplier of microinverters for the solar energy industry.
A Global Shift To Clean Energy
Enphase Energy is in the right place at the right time. Now, more than ever, the world is focused on a shift away from environmentally harmful fossil fuels. Instead, around the world, we are watching as adoption of clean energy continues to grow at a rapid pace.
In fact, the rapid pace of growth in the space continued throughout 2018. As a result, renewable energy now accounts for a third of the world’s power production capacity. There are multiple reasons for this shift:
- Environmental Impact – Any time the renewable energy conversation comes up, so too does the conversation surrounding global warming. As the global carbon footprint grows, the greenhouse effect that the growth is having on the climate is becoming easier to see. The global temperature is rising, leading to environmental threats including increasing veracity of storms, longer lasting droughts, issues in farming and agriculture and more. As a result, leadership teams around the world are looking for ways to reduce the human carbon footprint on the planet with the hopes of slowing the effects of global warming.
- Financial Impact – While the initial cost of setting up solar and other renewable energy farms can be great, the long term cost of maintenance is quite a bit lower than traditional power creation. As a result, more and more investments are being made in renewable energy power plants.
- Safety – Nuclear power plants are incredibly dangerous, threatening the safety of consumers for miles around them. Let’s not forget Fukushima, Chernobyl, Three Mile Island, or SL-1. All of these were serious incidents that took place as the result of a failure in nuclear energy production. When it comes to renewable energy, these dangers simply don’t exist.
- Availability Of Fossil Fuels – Finally, fossil fuels take millions of years to produce naturally, and making them in a factory is not possible. As a result, there is ultimately a limited supply. As that supply is used and demand continues to grow, the cost and availability of fossil fuels will likely become a problem.
So, the many reasons for the shift to clean energy are clear. While clean energy production now accounts for a third of the global energy production capacity, the growth isn’t likely anywhere near over. In fact, the clean energy market is expected to grow at a Compound Annual Growth rate of nearly 9% through 2023.
Considering Enphase Energy’s leadership role in the supply of microinverter systems, the continued growth only means that we’re likely to see continued growth in revenue from the company. Which brings me to my next point:
The Earnings Report By The Numbers
When it comes to Enphase Energy, the earnings report issued on May 1, 2019 says it all. First and foremost, the company’s revenue surpassed $100 million in a single quarter for the first time ever. In fact, the figure came in at $100.2 million. However, there’s plenty more to be excited about here.
Enphase Energy’s margins came in at 33.3%, representing a strong year over year increase from margins at 26.2%. Much of the margin growth was the result of increased adoption of the company’s latest-generation IQ7 microinverters, which accounted for about 94% of shipments in the quarter. This is important as these microinverters are not only the company’s best performers from an efficacy standpoint, but they come with the highest margins.
The improved margins have given way to the company’s rise to profitability in recent quarters. In fact, gross profits for the quarter came in at $33.3 million, an 82% increase over the $18.3 million in gross profits in the first quarter of 2018. Moreover, net income came in at $2.7 million, compared to a net loss of $5.1 million in the first quarter of 2018.
Finally, the company’s newfound financial flexibility seems to be being used pretty effectively. In fact, a combination of cash on hand and operating cash flow was used to pay debt down by $41 million during the quarter, setting a strong foundation from which the company can build.
Enphase Is Working Hard To Keep Up With Demand
It’s also worth mentioning that the company’s rise is impressive, but it was hindered a bit by its inability to keep up with demand. In fact, the company has been dealing with component shortages that have hampered shipments.
Nonetheless, Enphase Energy is working to solve this problem. Nonetheless, new capacity that was originally funded in May of 2018 came online during the first quarter of 2019. The company is also expected to continue increasing capacity over the next three quarters.
So, while component shortages may have hampered shipments during the first quarter, the company is working hard to meet the growth in demand. As a result of the increasing capacity, we can expect to see incredible growth in revenues in the quarters ahead.
Consider The Risks
Investing wouldn’t be investing without risk. The good news is that when it comes to an investment in ENPH, the risks are relatively minimal. Here’s what you should consider before diving in:
- Capacity – As mentioned above, component supply played a negative role in the company’s ability to grow in the first quarter. While new capacity has come on line during the period, this isn’t going to be enough to keep up with growing demand. Investors will be watching the company’s work closely over the next three quarters to meet the demand for its products.
- Slowing In Clean Energy Uptake – While there is no sign of slowing in the uptake of clean energy globally, if global demand were to falter, we could see declines in demand for the company’s products, which could cause some pain.
- Government Opinions – Finally, much of the growth that we’ve seen in the uptake of clean energy has to do with government opinions and subsidies. For example, adoption of solar technology in China is leading the charge as Chinese subsidies and other efforts to support clean energy lead to increased demand. Should we see a shift in global subsidies, rewarding those that shift to clean energy, we could see a reduction in demand, ultimately causing pain for the bottom line of Enphase and others in the industry.
The truth of the matter is that when it comes to Enphase Energy, the risks are minimal while the rewards have the potential to be massive. At the end of the day, we’re talking about the company that leads the charge in the solar microinverter market at a time when solar and other forms of clean energy are in high demand.
As the company continues to expand capacity, improve margins, and pay down its debt, the value proposition only grows. All in all, if you’re not paying attention to ENPH stock yet, you should be!
What Do You Think?
Where do you think ENPH is headed moving forward? Join the discussion in the comments below!