Solar microinverter manufacturer Enphase Energy (NASDAQ:ENPH) reported better than expected Q1 results on April 26. Its revenue came in at over $441 million for the quarter. This was much higher than the $420 to $440 million range the company forecasted last quarter. As a result, both management and ENPH stock now have much more credibility.
Even more important, Enphase reported that its operating cash flow and free cash flow (FCF) were solidly positive. It reported that cash flow from operations in Q1 was $102.4 million. After deducting $12.4 million in capex spending, its FCF came in high at $90 million. This was not only 7% higher than Q4’s $84 million in FCF but also represents over 20% of sales.
Producing high positive FCF in this solar industry is very important for several reasons. First, many companies in this industry are not very profitable. But Enphase doesn’t produce solar cells. It produces microinverters that make each solar panel much more efficient. It converts DC electricity into AC current at the solar panel level and provides huge efficiency to installed solar systems. As a result, it fills a real need and highly profitable niche in the industry.
Second, having positive FCF means Enphase won’t be burning through its cash balance. And lastly, it helps raise the value of the stock. Here is how that works.
What ENPH Stock Is Worth
Analysts now forecast ENPH will produce $2.69 billion in revenue by the end of 2023. This is up 31% over the $2.05 billion in revenue seen for 2022. Applying a 20% FCF margin to this revenue means Enphase will generate $538 million in free cash flow. That will increase its cash balance and push ENPH stock higher.
We can use a 2% FCF yield metric to value ENPH stock. This is the same as multiplying FCF by 50 and results in a target market cap of $26.9 billion. This $26.9 billion market valuation is 21% higher than Enhase’s present $22.2 billion market cap.
As a result, we can confidently predict that ENPH stock is worth 21% more, or almost $200 per share. That is a direct result of Enphase’s excellent FCF results this quarter.
Moreover, the company guided that it expects to see revenue rise substantially in Q2. From $441 million in Q1, it sees $490 to $520 million in revenue in Q2.
The bottom line is that Enphase’s microinverters fill a real solar industry niche and it is enjoying the benefits of the solar industry growth. ENPH stock will reflect this over the coming year.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.
