Investment Thesis
Solar industry hits inflection point
The cost of producing solar power is rapidly declining - it now costs $50 to produce one megawatt-hour of solar power compared to coal, which costs $102 per megawatt-hour to produce. This allows economics to dictate adoption, and while solar energy is still a relatively small portion of the overall energy produced, the growth rate is rapidly accelerating, with a decade or more of hypergrowth before likely becoming the most prevalent source of electricity. Energy storage is similarly decreasing in cost, making it feasible for solar customers to keep the energy they produce and use it when they want, with the ability to go completely off the grid.
Enphase positioned to take leadership role
Inverter technology is one of the most important components of a solar energy system, business or power plant. Enphase offers what is probably the most advanced microinverter technology on the market today, has changed the solar industry in just a few years. Enphase has a 27% 5-year CAGR, which is now beginning to accelerate, and as it expands into battery storage and intelligent energy management, the market opportunity is getting bigger. With revenues still under $1 billion, Enphase is relativelygrowth cycle.
Valuation now presents a bargain
With a $3.2 billion market cap, Enphase is now trading at less than 4x expected 2020 revenue and 20x expected 2020 earnings. The stock was up as much as 120% this year, but has returned to levels not seen since last year. Economic activity will likely see a slowdown due to the COVID-19 pandemic, and Enphase may see some direct impact. However, for long-term investors, top and bottom line are likely to still both grow at a torrid pace over the next decade and the company’s growth should continue to support growth in the share price for patient investors. We have a $65 price target for the end of the year.
Why we own Enphase
As an emerging leader in what will become the world’s largest source of energy, Enphase should be on many investors’ radar. Its low Beta, highly transparent management and a global market that the company is only just beginning to enter makes this for any sound holding. We held off owning until now based on valuation and our required margin of safety, but find any price below $35 attractive.
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