Over the last few years, there has been a lot of solar stocks that have tried to establish themselves on the market. However, one of them stands out above the rest and that is Enphase Energy (ENPH). Recently, Enphase Energy has taken a tumble, dropping by 26.5% in the last 6 months! Currently, the stock trades at about $195 dollars after going up to almost $340 dollars in December of 2022. Today, we are going to take a look at some reasons why we should be bullish on Enphase Energy.

Growth Monster

First of all, the growth! Enphase Energy is a growth monster! The expected EPS growth over the next 3 years is between 20 and 35% annually! There is not a lot of stocks that can do this, but Enphase Energy is at the center of a rapidly growing industry. The solar sector, obviously. Everyone knows that solar is the next big thing in energy. Unlike other solar companies which focus on solar panels or operations, Enphase Energy is focusing on the products that make these solar panels work and connect to the grid. Microinverters, batteries and all the small electrical products in between, even electrical vehicle chargers after Enphase Energy acquired ClipperCreek in December 2021. They have made a number of other acquisitions to help streamline the process for installing its products, getting customers, utilizing the IoT devices and solutions that Enphase offers and so on. Plus, they are developing newer, better products to improve their value offering! One product of Enphase Energy that I am extremely excited about is the Portable Energy System. It was originally introduced to investors as something that is being developed for off-grid communities such as rural Indian communities. The total addressable market there is really massive and I think that once this product is introduced, Enphase Energy will take things to the next level! Unfortunately, I haven't been able to find much about it recently, but it still in development so I will keep an eye out for any news and let you know.

Now, the best thing about these specific products is that they have much higher margins than solar panels. That's what allows Enphase Energy to grow at such a rapid pace. Since 2018, Enphase Energy has gone from $316 million in revenue to $2.3 billion! In the last quarter, Enphase Energy made about $724 million and they are expecting the next quarter to be around $700 to $740 million. When it comes to net income, it has also risen from a loss of $11.6 in 2018 to almost $400 million in 2022! Enphase Energy also has a steady, stable free cash flow which has grown from $47 million in 2018 to $501 million in 2022. That's a compounded annualized growth of 60%! Sixty percent! Now, I don't expect the company to keep it up, but even if it grows by 30 or even 20%, that is still outstanding. As you know, the solar market is only just getting started and Enphase Energy is already at the vanguard, leading the market in terms of microinverters and other products. How can you not be bullish on that?

Management and Expenses

The second bullish reason is that the management team of Enphase Energy is focused on expense control. The biggest problem with companies that grow rapidly is the fact that they expand too fast or they cannot get their finances in order. Enphase Energy is clinical in that regard. They have a strict operational model of 35% gross margin, 15% operating expenses and 20% operating margin. A big reason why they manage to keep their expenses low is because they focus their manufacturing operations in India and Mexico. Enphase Energy is also starting to manufacture microinverters in Romania so that they have better access to the European market while keeping expenses relatively low. Interestingly enough, Enphase Energy will also begin manufacturing of microinverters in the US thanks to the Inflation Reduction Act. I think the estimated date for the opening of the US manufacturing is somewhere around the second quarter of 2023, but the idea here is that a lot of the expenses will be offset by the tax credits from the Inflation Reduction Act.

Finances

The third bullish reason is their finances. They are solid. Rock solid. A quick glance at the balance sheet tells us that Enphase Energy has a steady hand on their finances. Even though they have $1.2 billion in long-term debt, they have a cash position of $1.6 billion to cover that. Their accounts receivables cover their accounts payables by almost 4 times. I know a lot of people don't really care about a company's finances too much. I personally have. I have always preferred companies with lower debt and I think this is going to be a lot more important going ahead with interest rates currently being at 5%. It will be a lot more expensive for companies to manage their debt so seeing that Enphase Energy has no issues there is a big green flag in my books.

Valuation

So, with Enphase Energy we have a market leader in solar, we have a rapidly growing company, we have a good management team, we have solid finances. What is the price tag here? How much are we paying right now? Like I said, Enphase Energy dropped 26.5% in the last 6 months to a price of about $195 dollars. Now, the valuation looks expensive at first glance. The forward PE ratio is 37, but is is much lower than the historical average for Enphase Energy of 60.1. Plus, the price-to-earnings growth ratio is only 0.77! With growth companies, that's really the most important thing to look at. How much are we paying for the growth? In this case, it's not that much! Anything under 1 is undervalued so 0.77 is great value. Forward price-to-book and forward price-to-sales ratios are looking expensive again at 19.15 and 8.8, but again, they are not that important when it comes to rapidly growing companies. It is obvious they are going to be high. There is no other way.

Now, really, the main question with Enphase Energy is do we think they are going to grow this fast? If yes, then the price is great. If not, then we are going to be buying one very expensive company. Personally, I want to be optimistic and here is why: the last time Enphase Energy missed earnings estimates was in December 2018, more than five years ago! They keep beating estimates with about 10 to 20% surprise. Of course, past performance doesn't mean they will continue to do that in the future, but my point here is that Enphase Energy has given us no reasons to doubt them. Right now, the company is trading 20% under its 100 and 200-day moving average and, really, the price right now offers you a great opportunity to jump in if you are optimistic about the company. If not, well, thank you for sticking around and reading the full post.

Either way, let me know what you think in the comments below. Are you bullish? Are you bearish? What do you think?