A return of more than 4,000% in just a few years is the stuff of investing dreams. Occasionally, though, it can also be reality. Take Enphase Energy (NASDAQ: ENPH) as an example. Over the past five years, Enphase Energy stock has soared 4,154%.
Could there be more strong gains in the future – and should I buy now?
Soaring price
Why has Enphase Energy stock taken off the way it has?
The firm’s solar inverters have made it popular with investors looking for renewable energy shares to buy. But the company is not just a pipe dream based on long-term trend forecasts. It has a sizeable and fast-growing business. Revenues last year were over $2bn and have grown over 900% in the past five years. Meanwhile, the company made almost $400m in net income last year.
Not only does that mean it has a net profit margin in the high teens, it also means that the company trades on a price-to-earnings (P/E) ratio of 76. That is far higher than I would normally consider. But if earnings keep growing at their present clip, the prospective P/E ratio could be markedly lower.
Future outlook
Last year, net income more than doubled. Could things get even better from here for the share price?
Deutsche Bank seems to think so. Last week, the German bank raised its target price for Enphase Energy stock. One of the drivers for a possible price increase Deutsche analysts pointed to was an upcoming increase in the solar firm’s production capacity. New US contract manufacturing capacity is due to come online this year.
The company benefits from proprietary technology and a lean business model that generates a gross profit margin of 35%. It has built a network of installers that I think could help it sell and maintain systems for many years to come, helping it expand its already sizeable customer base.
Is Enphase Energy stock a bargain?
I definitely think there is a lot to like about the company and its business model.
That said, I do see risks too. Solar energy is a fast-developing field. That is good in terms of ongoing demand growth, but I also expect it to translate into tougher competition in future.
On top of that, I see risks in Enphase’s asset-light business model. Outsourcing manufacturing can help build scale without incurring large capital expenditure. But it often also means a company ends up having less control over its supply chain. If a contract manufacturer increases prices, for example, that can hurt profitability.
Despite those risks, I think Enphase has great potential. Its business model has already proven itself, and I think its addressable market is set to grow strongly in coming years. That could be good for revenues and profits.
But given its current valuation, I do not see Enphase Energy stock as a bargain. To justify its current price, the company needs to blow out the lights in coming years. That could well happen, but I feel the valuation offers too little margin of safety for my tastes. So, for now, I shall not be buying.
