Solar Play Enphase Energy Continues to Shine

The runup in Enphase Energy (NASDAQ:ENPH) stock has been nothing short of spectacular. Shares of the California-based solar technology company are worth nearly 10 times what they were just 12 months ago.

What's behind the incredible rally in Enphase Energy stock—and can the show go on?

Enphase brought a seven-month winning streak in this week's earnings report. All indications are that the past, present, and future are bright for this up-and-coming solar play.

What Did Enphase Energy Report for Q4?

Enphase Energy logged another shining performance in the fourth quarter. Revenues increased 26% to $264.8 million. For the full year revenues were up 24% to $774.4 million and the gross margin expanded significantly from 35.4% to 44.7%.

Net income came in at $73 million which was down from $117 million in the prior-year period. The main reason for the lower earnings was higher shipping and logistics costs. Enphase encountered constraints in the global semiconductor supply chain that ultimately forced the company to expedite shipping to keep customers happy.

Interestingly, the bottom-line performance was helped by a $16.5 million refund on tariffs that were charged on imported products from China.

Enphase noted strong demand for its microinverter systems across all regions. It achieved record sell-through of its core product from distributors to solar system installers. Last quarter alone it shipped nearly 2.3 million microinverters which equates to approximately 762 megawatts of power.

What Will Drive Future Growth at Enphase Energy?

Taking a step back, Enphase Energy provides energy management technology to solar energy companies. It sells solar-plus storage systems that are based on microinverter technology.

To the layperson, this may sound overly technical but at the end of the day, Enphase technology combines regular solar systems with battery power to squeeze more out of them. This allows solar energy to be used more efficiently even at night or on cloudy days.

Knowing this it's easy to see why customers want the Enphase technology in their solar system—and why solar panel makers consider it must-have. End customers of solar systems, whether residential or commercial, benefit from more favorable economics because energy usage can be smoothed throughout the day making it a more cost-effective endeavor.

The opportunities for growth within the global solar energy market are huge. As the technology becomes more cost-effective and businesses and households continue to move towards cleaner, alternative energy sources, demand for Enphase microinverters is expected to remain strong.

The company isn't stopping there. It is forecasting that new product introductions around residential and commercial solar energy and storage will expand its addressable market to $12.5 billion by next year compared to $3.3 billion just two years ago. Growth opportunities in residential energy storage and smart energy systems for the home are particularly intriguing.

Like many technology companies, Enphase has also embarked on a digital transformation designed to make its offerings more valuable to solar customers. The day before earnings it announced the acquisition of Solar Design Services, an India-based provider of digitally based proposal drawings and permit plans for North American solar installers. This came on the heels of the recently completed acquisition of Sofdesk, a maker of design software for solar installers. The addition of these complementary businesses diversifies the business away from the core microinverter business and gives Enphase some nice auxiliary growth levers.  

Is it too Late to Buy Enphase Energy Stock?

Building off the success of its microinverter technology, Enphase is in the process of morphing into a home energy management systems company. This a mouthful, but it means the company will be relevant for many years to come as households take energy efficiency to a whole new level with the adoption of digital energy management solutions.

Last month Enphase Energy stock reached a peak of $222.43, its all-time high. The stock has since pulled back about 10%. Corrections like these have proven to be buy opportunities and the current situation is no exception.

While the $200-plus share price and astronomical P/E ratio may be hard to digest for some investors, keep in mind that Enphase Energy is still in the early innings of a very large long-term growth opportunity. Plus, relative to the company's growth metrics the valuation isn't so outlandish. A PEG ratio of 3.4 is reasonable if not inexpensive for a high growth stage company like this.

What does the Street think? Of the nearly 20 sell-side firms that now cover Enphase Energy, the opinions are mixed but skewed to the bullish side. Although last month Raymond James gave the stock its only 'sell' rating, most analysts call it a 'buy' with price targets as high as $254.

Enphase Energy looks like it has plenty of staying power in the global solar energy and storage markets. Growth investors with a long-term horizon need not be too picky regarding an entry point on this shining star.