Enphase (NASDAQ:ENPH) has performed remarkably well given the circumstances. The higher interest rate environment has heavily impacted the solar market, but ENPH has managed to show resilient profit margins, especially when compared against its closest competitor. Management believes that they have already seen the worst, with numbers expected to pick up moving forward. Investors might have doubts about such a bold claim, but it bears remembering that the company is set to start lapping easier comparables. The valuation is not quite representative of what you’d typically expect from a stock going through such tough market conditions, but the premium makes sense if one looks forward to the company emerging from a position of strength. I rate the stock a buy as the company has more than proven its resiliency through the cycles.

ENPH Stock Price

I last covered ENPH in April where I called it a top solar pick, not necessarily due to valuation but instead due to its stunning execution. The stock has since slightly underperformed broader markets.

The stock isn’t cheap, but I see upside ahead, especially if management is proven correct about improving conditions moving forward.

ENPH Stock Key Metrics

ENPH sells products that help optimize power conversion from solar systems.

That alone already positions the company among the more lucrative sub-sectors of the solar industry. The company’s microinverters appear to offer technological superiority to traditional string inverters due to inherently higher reliability and performance.

I was a skeptic of that technological superiority justifying the elevated valuation in the past, but the numbers don’t lie. In its most recent quarter, ENPH did see revenues implode over 60% to $263.3 million, coming in at the low end of management guidance of $260 million to $300 million. But gross margins came in 500 bps higher at 46.2%, and operating margins remained positive at 14.8%. In contrast, SolarEdge (SEDG) has seen its margins turn sharply negative. ENPH has been able to maintain some pricing power even in the worst of environments.

The company did see GAAP net income turn negative, but the $16.1 million loss was quite modest. The company did remain profitable on a non-GAAP basis.

ENPH ended the quarter with $1.6 billion of cash versus $1.3 billion of debt, representing a solid net cash balance sheet. The company repurchased $42 million worth of stock in the quarter, a potentially controversial decision given the tough market conditions and not-quite-distressed stock price.

Looking ahead, management has guided for revenues to decline by around 60% to $290 million. This, however, does imply double-digit sequential growth, and I note that the fourth quarter will be lapping just $302.6 million in revenues in 2023. Management expects gross margin to remain strong at up to 47%, with roughly breakeven GAAP operating margins.

On the conference call, management stated that they believe the first quarter was the “bottom.” Management outlined plans to under-ship to end market demand by around $90 million in the second quarter. Management expects microinverter channels to normalize by the end of the quarter and normalized that batteries have already normalized. Management noted that Europe had already begun to recover, and that they expected California to see increasing demand by the end of this year.

Management emphasized that they have remained “disciplined” on pricing, which is surprising given that SEDG appears to lack that luxury. Management did address reports of aggressive pricing from Tesla’s (TSLA) string inverter products. Management reiterated their belief in the superiority of their microinverter products and the pricing power that this entails but indicated a willingness to drop pricing if they “aren't providing as much value compared to competition.” I interpreted the last part of that as not implying price reductions moving forward, but instead emphasizing the value they are providing to consumers.

Is ENPH Stock A Buy, Sell, or Hold?

Heading into this solar bear market, investors likely had a lot of questions. How might margins fare upon declining demand? Will ENPH lose market share to cheaper competitors like TSLA? It appears that these questions have been answered.

ENPH’s strong execution is reflected in the stock price, with the stock trading at 47x earnings. Earnings are expected to bounce back dramatically next year.

The company trades at around 8.5x 2025 consensus revenue estimates. I see this company sustaining 30% net margins over the long term - 8.5x sales equates to around 28x long-term earnings.

The stock isn’t cheap, or at least not as cheap as one would expect from a company projected to see revenue plummet 35% this year. But I think the market is pricing in some forward-looking assumptions. First, the company may be poised to take market share as it leans on its financial strength against competitors’ financial weakness. Second, and perhaps most importantly, the company has shown financial resilience amidst market troughs, and this performance may have earned it a premium valuation. Whereas peers might always carry a cyclical discount, ENPH has shown that its products can sustain pricing power even in the worst of times. It is admittedly hard to justify more multiple expansion today, but the stock may deliver solid returns if the company can average around 15% top-line growth moving forward. The stock appears to offer some optionally as it looks reasonable-to-richly valued as of today's financials, with the prospects of a cyclical upswing at some point in the future.

ENPH Stock Risks

The main risks are twofold. First, management might be overly optimistic in their assessment that the worst is behind them. After all, the solar industry does not have historical precedence for how to navigate rapidly rising interest rates. The other risk is that of valuation. The quality thesis is clearly driving the valuation today - if the market begins to view this as being of a lower quality business model, then the stock has substantial room to fall, especially relative to where SEDG is trading.

ENPH Stock Conclusion

I reiterate that ENPH stock is not cheap. The investment thesis centers around continued strong execution on pricing power, an upcoming recovery in the solar markets, and the stock’s ability to sustain a premium valuation. The stock is definitely at the high end of my fair valuation range, without clear potential for multiple expansion upside. This remains an attractive opportunity to purchase shares in a long-term growth winner.