Enphase (NASDAQ:ENPH) has a very strong business and multiple, powerful positive catalysts. Overall, the company’s outlook is superb. However, its stock on the other hand, is another matter. ENPH stock is overvalued and unlikely to perform very well in 2022.
Additionally, I believe that other equities in the solar-energy sector are much better positioned to outperform over the longer term.
As a result, I don’t recommend buying ENPH stock at this point.
Let’s dive into the details of my concerns surrounding this great company but unattractive solar stock.
A Strong Business with Powerful Catalysts
Enphase’s third-quarter revenue jumped to a record $351.5 million, up from $178.5 million during the same period a year earlier. Moreover, its earnings per share (EPS), excluding certain items, climbed to 62 cents from 33 cents during the same period a year earlier.
Finally, Enphase generated a healthy $113.4 million of cash flow from its operations and exited Q3 “with $1.4 billion in cash, cash equivalents and marketable securities.”
As far as positive catalysts, I continue to believe that Enphase and other solar stocks will benefit from the electrification of transportation. The latter trend is likely to be accelerated both by the infrastructure law that passed last year and by automakers’ tremendous, ongoing shift to electric vehicles.
Meanwhile, the Democratic-controlled Congress will likely pass new incentives for solar energy this year. And even in the face of major problems caused by the pandemic and global supply-chain issues last year, the International Energy Association last month forecast that “renewable electricity capacity” would soar 60% by 2026. So, as the issues faced by the solar sector in 2021 ease this year, Enphase’s inverter sales growth is likely to stay elevated in 2022 and subsequent years.
California Considering Cuts to Solar Incentives
On a negative note for ENPH stock and other solar names, the California Public Utilities Commission recently proposed meaningfully lowering the amount that homeowners can earn from selling electricity generated by their solar panels. Under the agency’s proposal, a new $8 per kilowatt fee would be paid by homeowners who install solar panels and do not qualify for low-income status.
But even if the proposal is passed as is, which I have some doubts about, the increase in solar energy price in much of the state would be partially offset by a “market transition credit” of between $1.62 per kilowatt and $5.25 per kilowatt, depending on household income and region. Meanwhile, under the proposal, a fund worth up to $600 million would be launched to, between 2022 and 2026, install “clean energy [systems in] low-income and polluted neighborhoods,” the Los Angeles Times noted.
Additionally, for Enphase, which has a rapidly growing energy storage business, the fee increase would also be partially offset by increased incentives for the owners of solar panels to add energy storage systems.
Valuation Is a Big Issue for ENPH Stock
Between Dec. 8, 2021 and Jan. 4, 2022, the shares fell 20%. Nonetheless, the stock was still changing hands as of the close on Jan. 4 at a price/earnings ratio of 184 and a price-sales ratio of 32. And then today, Jan. 5, ENPH stock appears to be sliding downward once again.
At a time when the Street is getting much pickier about valuations than it had been from mid-2020 to the early fall of 2021, many investors could easily decide that Enphase’s shares are simply overpriced. As a result, I think that the shares are fairly risky at their current levels and unlikely to outperform in the medium term.
Two Better Solar Stock Alternatives
Like Enphase, Shoals sells important components used in solar-energy systems. Also similarly to Enphase, Shoals is growing rapidly; its revenue rose 14% year-over-year (YOY) in Q3, while its “backlog and awarded orders doubled YOY, reaching a record $270.7 million.” And finally, Shoals anticipates that its earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding certain items, will reach $22 – $24 million this quarter, up from $16.9 million in Q3.
JinkoSolar, the world’s second largest solar panel producer, recently announced that it would partner with a huge oil company, Sinopec Star, “to develop solar-to-hydrogen plants.” Jinko is also partnering with another very large Chinese company in its home market, Contemporary Amperex Technology Co., or CATL, on storage-and-solar solutions.
Both of these deals are likely to positively move the needle for JKS stock.
For the fourth quarter of 2021, JinkoSolar anticipates that its “total shipments” of solar products will jump to around 7.3 and 8.8 gigawatts, way up from 5.77 gigawatts during the same period a year earlier. Yet, the company’s forward price-earnings ratio is a measly 10, and its trailing price-sales ratio is a tiny 0.42, according to data provided by Yahoo Finance.
The Bottom Line on ENPH Stock
Enphase’s high valuation makes its shares unattractive at this point. Long-term, growth investors looking for exposure to the solar sector are better off buying JKS stock and/or SHLS stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.