What a time it’s been for Enphase. In the past six months alone, the company’s stock price has increased by a massive 90.1%, reaching $52.48 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Enphase, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Enphase Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Enphase. Here are three reasons you should be careful with ENPH and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Enphase’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 12.5% over the last two years.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Enphase’s margin dropped by 10.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Enphase’s free cash flow margin for the trailing 12 months was 10.4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Enphase’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of Enphase, we’re out. After the recent surge, the stock trades at 23.5× forward P/E (or $52.48 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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