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The ongoing Russia – Ukraine conflict has pulled the rug under the feet of the developed countries in Europe, regarding their energy supply. In fact, many may say that it was Europe’s response which created this situation, but that goes beyond the scope of this article, which is to see some reasons why Enphase Energy (NASDAQ:ENPH) can benefit from the implications that have arisen by the current situation.
Accelerated Energy Transition
According to a broad consensus, the world needs to move towards cleaner energy forms at a quicker pace. And as a matter of fact, many things have taken place in the last few years to do that, ranging from lowering emission standards for transportation and commodity vehicles (cars, ships etc.) to developing and adopting “green” (or at least greener) energy sources, such as solar or wind power. For instance, the EU has set a goal to become energy neutral by 2050, by slashing its CO2 emissions, and achieving 40% contribution in its energy mix from renewable energy sources. In addition, Biden administration announced a year ago that his country’s goal is to reduce gas emissions in half of levels recorded in 2005, by 2030.
Of course, these things don’t happen from one day to the next and that is why the U.S. announced that they will support Europe’s energy needs by providing LNG. And by all means, as I wrote in some of my previous articles, an investment in LNG carrier companies absolutely makes sense right now. However, it is far more expensive than the Russian natural gas and doesn’t solve the energy dependability issue of Europe. In other words, it is a last resort solution.
In that sense, it is no surprise that the European Commission recently created a plan that aims to accelerate that energy transition. The President of the EU Commission, Mrs Ursula von der Leyen said:
The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.
In addition, EU Commission’s Executive Vice President, Mr Frans Timmermans said:
Let’s dash into renewable energy at lightning speed. Renewables are a cheap, clean, and potentially endless source of energy and instead of funding the fossil fuel industry elsewhere, they create jobs here.
As a European citizen, I have to say that listening to multinational organizations such as EU and its Commission make announcements that are as straightforward as they get, is a very rare thing, which makes me believe that they’re actually mean their words.
The Issue Of Energy Storage
The most important headwind for the renewable energy transition is the issue of the energy storage, as renewable energy sources normally do not operate 24/7 and are not demand driven. This issue creates power grid stability problems that can be tackled using energy storage solutions. During the last quarter, Enphase reported a 30% increase in its energy storage associated revenues, on a YoY basis. On a personal / house PV installation level though, the company has another ace in its sleeve. As an owner of a small house net metering installation, I didn’t like the fact that when the power grid is off, the PV installation doesn’t produce any power, as the inverter is down. With its IQ8 microinverter, Enphase Energy has tackled this problem, which opens up a whole new perspective for solar PV home users.
In addition to this though, let’s not forget the “traditional” energy storage solutions offered by the company, especially in the rise of the electric vehicles. A typical EV charging installation increases power consumption by approximately 15 kWh per day. This creates increased energy storage demands, not only for off grid users, but also for net metering installation owners, as they can avoid the extra costs of their solar PV produced energy moving from the installation to the grid and vice versa (where it applies). But it is also a nice, indirect opportunity for increased market penetration of the company’s storage solutions, as EV batteries could be used for home electricity supply.
How All These Connect To Enphase
Starting from the last paragraph, the acquisition of Clipper Creek in late 2021 makes perfect sense in the context of energy storage solutions market penetration. According to their latest earnings call, Enphase Energy expects Q1 2022 energy storage solutions shipments to range between 110 and 120 MWh, representing a 10% to 20% increase from the previous quarter and a nearly 200% increase from Q1 2021. Typically, the company’s revenues are generated by the U.S. to a percentage of 80%, while the rest is generated internationally. Given the reasons I quoted earlier, I expect this balance to shift more towards the international leg.
The increased clean energy hype during the last few years has pushed the company’s valuation a little too high, as the market expects the high growth rate to continue. The company’s revenues have been expanding at a 48% CAGR, which is quite spectacular. What is also spectacular is the company’s earnings multiple. Enphase Energy is currently trading at 80 times its FY 2022 earnings (non – GAAP). As spectacular as this number may seem, it becomes less spectacular if we account for the projected earnings growth of the company. According to earnings consensus found in SA’s premium webpage, Q1 2022 earnings per share will land in the ballpark of $0.68, forming an annual EPS estimate of $3.16. This figure makes a forward non – GAAP P/E ratio of almost 62x. However, given that Enphase Energy is a rapidly growing company, we should allow for this growth into the calculations. Therefore, I’m going to use a PEG ratio. Evidence of the recent past suggests that earnings are increasing at a rate of approximately 30% per annum. By using this figure and the FY 2022 non – GAAP P/E estimate, we get a PEG ratio of 2.07x.
In order to provide a sense of context, I will assess the valuation of another solar power inverter company, Solar Edge Technologies (SEDG). This company has a non – GAAP P/E ratio of 61x and a forward non – GAAP P/E ratio of 44x. According to earnings estimates found in SA’s premium webpage, the company expects its earnings to increase by at least 35% in the next two years. Plugging the numbers into the calculations we can derive a PEG ratio of 1.74x.
On the other hand, another competitor, Sunpower Corporation (SPWR), as a non – GAAP P/E ratio of 210x and a forward P/E ratio of 66x. The company’s earnings are expected to grow at triple digits in the next two years, so I will use a moderate 80% earnings growth for the calculation, which leads us to a PEG ratio of 2.6x.
So, what does that tell us? It simply tells us that investors buying Enphase Energy are paying more for each unit of earnings growth that those buying Solar Edge and less than those buying Sunpower Corporation.
Bottom Line
There is no doubt that Enphase Energy is a stock to own if you want to get exposure to the clean energy transition. Although the shares appear pricey at the moment, long term investors could still benefit from share price appreciation, fueled by extraordinary revenue and earnings growth. Moreover, we can also see that similar degrees of high valuation multiples have been assigned to the company’s competitors, give or take. This implies a general belief in the prospects of the solar PV sector and its associated goodies. I believe that Enphase has the potential to grow its international business and the contribution of the energy storage products to its revenue pie. Increasing these differentiated streams of revenue is something that will make a difference to the company. So, from a long-term investor’s perspective, I believe this is a long opportunity.
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