The selloff in solar stocks on Tuesday had a significant effect on the sector and even top performers like Enphase Energy (NASDAQ:ENPH) felt the pressure. Following the selloff, the Enphase stock decline by as much as 15%, but at the same time, it should be noted that it has gained as much as 300% so far this year. The gains over the past two years stand at 2000%.
Closer Look
Considering the gains made by Enphase, it is important for investors to figure out if the decline was an aberration or a correction. It should be noted that the stock had been trading for only $1 a share back in 2017.
However, the company managed to complete restructuring and in 2019, Enphase turned a profit as well. The stock rallied strongly as well and went from $1 to $100. In this regard, it is necessary to point out that the company’s main problems stemmed from the struggle for profitability from its flagship microinverter.
However, things changed in recent years as the cost of solar energy went down and the adoption of renewable energy went up in the United States. That proved to be a major boost for Enphase. Along with rivals SolarEdge, Enphase soon became the biggest player in the solar energy space.
Profitability and Concerns
In 2019, the company’s revenues soared considerably and it eventually turned a profit. In Q2 2020, Enphase reported a 6% year on year drop in revenues. However, despite the fall in revenues, Enphase managed to post its highest-ever gross margins of 39.6%.
That being said, questions have been raised about the company’s profitability in recent times. Under GAAP (generally accepted accounting principles), Enphase suffered a loss of $47.3 million in Q2 2020. In Q1 2020, the net income stood at $68.9 million. However, under non-GAAP rules, the company posted $23.9 million in net income in Q2 2020.
Valuation
Despite its relatively underwhelming performance in Q2 2020, Enphase remains an industry leader and as such, it commands a premium as far as valuation goes.
The premium is possibly linked to continued growth and profitability. At this point, the Enphase stock commands a price to sales ratio of as much as 19. That is twice the price to sales ratio of the SolarEdge stock.
The recent sell-off might seem like a good time to buy the stock but at the same time, there are significant uncertainties about Enphase at this point. Hence, it could be prudent to wait before making a move.
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