Enphase (ENPH, Financial) stock is a worthy opportunity right now; despite a weak Q3 performance and a subsequent ~20% price decline, I consider this an opportunity rather than a reason to exit the thesis. Investors should remember that investing in solar energy is a highly cyclical enterprise—any headwinds currently faced by Enphase are important to monitor but unlikely to persist. Therefore, medium-term value investors keen on positioning themselves for the coming upcycle (largely spurred by lower interest rates) should view Enphase's current weakness as an opportunity to capitalize on.

Operational analysis

Enphase is predominantly known for its microinverter technology, which converts solar energy at the panel level, increasing efficiency and reliability compared to traditional string inverters. This technology enhances energy harvest and reduces the risk of uneven panel performance, making it a leading choice for residential solar installations. In contrast, utility-scale solar projects typically utilize centralized inverters to achieve cost efficiencies over large areas of panels.

The company has also diversified its operations, offering smart solar inverters, battery storage systems, and energy management software. It has cleverly unified these offerings into its Enphase Ensemble, creating a cohesive brand.

While the majority of the company's revenue comes from the United States (64.1%), management has been actively expanding internationally, tapping into key markets like Europe, Australia, and parts of Asia. Although international expansion is expected to present a high growth opportunity for Enphase over the long term—and has already proven very accretive—its recent Q3 results indicated weakness in the outlook for Europe. In Q3, revenue from Europe declined by 15% quarter-over-quarter, while U.S. revenue grew by 43% quarter-over-quarter. However, I expect the headwinds in Europe will ease as the macroeconomy in America improves, providing broader tailwinds in the West.

Investors need to understand that Enphase is a cyclical investment, particularly due to interest rate impacts and regulatory changes. This helps explain the drastic decrease in revenues over the past year when interest rates were significantly higher than previously. It's also essential to put Enphase's substantial growth leading up to 2023 into context—the tax incentives from the Inflation Reduction Act have been extremely positive for Enphase. I don't expect the high growth from solar companies to abate; indeed, it appears that we are in the very early innings of solar becoming the predominant power provision on the planet through 2050, according to forecasts from the IEA.

Valuation and financial analysis

There are several promising investments in the solar energy markets right now, but a few that stand out to me include First Solar (FSLR, Financial), JinkoSolar (JKS, Financial), and, of course, Enphase. Therefore, these companies will be included in my peer analysis of investment allocation merit.

Of these investments, I find JinkoSolar particularly attractive for value investors. The company has a price-to-sales ratio of just 0.08—indicating deep value—and a price-to-book ratio of 0.48. Moreover, its price-to-earnings ratio is just 9, far below the industry median of 32.6. All of this presents great value for a company that boasts a three-year revenue growth rate of 35% (compared to the industry median of 6.7%) and a 10-year EBITDA growth that is substantial compared to its peers, First Solar and Enphase. In other words, JinkoSolar is a very attractive solar energy investment right now and worth buying.

However, the unfortunate reality in investing is that regardless of what a company may fundamentally be worth, there is also the question of what the market will pay for it. In the case of Enphase, it is valued at a premium compared to other solar stocks—perhaps illegitimately—but I still expect this premium to be maintained, primarily due to its strong American influence and positioning, which favors capital inflows from the U.S.

Fortunately, Enphase has a forward price-to-earnings ratio of 21.85—a relief from the present ratio of 191.7. However, its three-year EBITDA growth is only 55%, compared to 67% for JinkoSolar (though higher than 30% for First Solar). Therefore, investors may want to allocate to Enphase cautiously. It is worth buying right now, given the future growth prospects, but any stock trading at an unreasonably high valuation compared to another deep-value competitor with better growth rates warrants rational moderation.

At this time, I have a $135 price target for Enphase over the next 12 months, based on my estimate that it will trade at a non-GAAP price-to-earnings ratio of 32.5 and achieve a full-year normalized EPS of $4.16. The current price is $84.30, indicating a 60% upside potential, according to my analysis. The company's current trailing-12-months non-GAAP price-to-earnings ratio is 42.5, so I do expect this to contract somewhat as the business's earnings begin to grow substantially in FY25. Again, investors should understand that Enphase's valuation is likely at a sustainable premium, but this still adds vulnerability to the investment thesis and the risk of valuation contraction if market sentiment gradually shifts.

My estimate of a 32.5 non-GAAP price-to-earnings ratio reflects the company's current overvaluation relative to peers like JinkoSolar and First Solar, which trade at more favorable multiples. While the market may maintain a high non-GAAP price-to-earnings ratio of around 40 for Enphase into 2025, peer valuation discrepancies could pressure investor sentiment over time. I have factored this peer-based valuation assessment into my price target to account for potential sentiment-driven adjustments.

Risk analysis

There is considerable weight to the thesis that the curve of solar adoption is now unstoppable. Even without further policy support, I expect that the low cost of solar power is now too attractive for the global economy to pass up. The global weighted average levelized cost of energy for solar PV projects has seen dramatic declines, making it 56% cheaper than fossil fuel-fired alternatives as of 2023. Therefore, let's be realistic—solar power is not going away any time soon. It follows that the solar investment thesis will remain robust if one invests in well-managed, market-leading solar power businesses. Indeed, I consider Enphase to be one of these. I also believe we are in the very early stages of solar adoption. Current estimates indicate that solar energy will be the predominant power source through 2050—but beyond this, I foresee further proliferation and technological advancement to come. From now until 2050, we arguably have the highest growth phase to capitalize on as investors.

That said, to strengthen the counterargument, proponents of a fossil-fuel-based economy argue that fossil fuels are not dependent on weather conditions, unlike solar power, and can provide a consistent energy supply to meet demands. However, proponents of fossil fuels who argue this case have yet to acknowledge the growing viability and utility of solar power storage. The fossil fuel industry also wields substantial political influence, often outspending clean energy groups in lobbying efforts to maintain favorable policies. For example, between 2008 and 2018, trade associations opposed to climate policies spent $2 billion on political activities, outspending climate-supporting groups by a ratio of 27 to one. I consider this the biggest risk to long-term solar adoption. With the wrong government leadership around the world and a gradual shift away from climate concern, sentiment and spending on solar power will likely decrease.

In conclusion, it's crucial to recognize the strengths and unstoppable nature of solar power adoption. In 2023, 81% of newly commissioned utility-scale renewable projects, including solar, had lower costs than their fossil-fired alternatives. Moreover, the cost of storage technologies has dropped significantly, with project costs decreasing by 89% between 2010 and 2023. This reduction facilitates the integration of high shares of solar capacity into the grid, addressing infrastructure challenges and enhancing grid stability. For these reasons, I expect the long-term high solar adoption thesis to be largely inevitable, with any pushback being temporary and susceptible to economic factors.

Conclusion

Enphase stands as one of America's most prominent and well-established solar power companies. With solar energy adoption now on an irreversible global uptrend due to its low costs, it is likely to emerge as the dominant form of power provision over the long term, outpacing fossil fuels and other renewable energy sources—even without further policy support such as the Inflation Reduction Act. Given this backdrop, Enphase stock presents a compelling buying opportunity; as a leader in U.S. solar power, the company is well-positioned for investors looking to capitalize on the significant growth expected from the solar power upcycle in 2025 and 2026. My 12-month price target is $135, indicating a 60% upside potential from the current price at the time of writing.