Why the Outlook of Enphase Energy Has Become Bullish
Posted On March 25, 2022
Enphase (NASDAQ:ENPH), a company that develops microinverters used in solar energy systems, reported outstanding fourth-quarter (Q4) results. The overall outlook of the solar-energy sector has brightened and I have turned bullish on ENPH stock.
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In a previous column on the stock, published on Jan. 5, I had written that, although the company’s outlook was positive, I was cautious on the stock due to its extremely high valuation.
In light of recent developments, however, I no longer believe that the valuation of ENPH stock is excessive.
Outstanding Fourth-Quarter Results and Guidance
Enphase reported Q4 earnings per share of 73 cents, versus analysts’ average outlook of 59 cents. Its top line surged 56% year-over-year, coming in at $413 million. Analysts’ mean estimates had called for sales of $400 million.
Enphase’s operating income (OI), excluding certain items, was $97.7 million, significantly higher than the $86 million of adjusted OI that it generated in Q3. Meanwhile, despite cost pressures driven by high inflation and supply-chain issues, Enphase’s Q3 gross margin was 40.2%, unchanged versus the same period a year earlier.
Enphase also provided great Q1 guidance. Specifically, the company predicted that its Q1 sales would be between $420 million and $440 million, well above analysts’ mean outlook of $407.1 million. Enphase expects its Q1 adjusted gross margin to be 38% to 41%.
In the wake of the Q4 results, Craig-Hallum raised its rating on ENPH stock to “buy” from “hold.” The firm wrote that the company “’emphatically demonstrated its market leadership and ongoing strong execution.’”
Piper Sandler was also very bullish. According to the latter firm, the company’s Q1 outlook indicates that it anticipates that its Q1 operating income will be 18% above analysts’ previous mean estimate.
Outlook of the Global Solar Sector Has Improved
In the wake of Russia’s invasion of Ukraine, European leaders have vowed to accelerate their use of solar energy beyond their previous plans. Specifically, the European Commission, the bloc’s executive branch, intends to accelerate its rollout of rooftop solar panels this year sufficiently “to save 2.5 billion cubic meters of (natural) gas, “CNBC reported recently.
What’s more, in June, the Commission plans to unveil additional strategies to accelerate the adoption of solar energy. And in May, the Commission will present a plan to streamline the bureaucracy involved in obtaining permits for all renewable energy projects.
Meanwhile, according to PVTech, the demand for solar modules has jumped a great deal since the second half of 2021, as most sizable companies jumped on board the push for decarbonization. As a result, the publication explained, solar module prices have climbed over the last year, destroying the solar bears’ previous argument about solar panels being “commoditized.”
Demand is outstripping supply and is continuing to do so. While a shortage of polysilicon — the raw material used to make solar modules — is being addressed, solar module prices should continue to climb and modules makers’ margins should rise going forward, PVTech hypothesized. In my view, that dynamic should also, over the longer term, enable Enphase’s margins to increase or at least remain at their current levels.
Also likely to boost the demand for solar modules and, by extension, Enphase’s inverters is the elevated price of natural gas around the world in the wake of Russia’s invasion of Ukraine and the sanctions that have subsequently been placed on Russia by many of the countries in the world.
The Bottom Line on ENPH Stock
In light of Enphase’s wonderful Q4 results and Q1 guidance, along with the much improved outlook of the solar sector, I’m now very bullish on Enphase. In fact, in a recent column, I named Enphase as one of seven stocks that is well-positioned to triple this year.
Given these points, I remain very upbeat on ENPH stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.