In a March 19 research note, analyst Pavel Molchanov reported that Raymond James downgraded its rating on Enphase Energy Inc. (ENPH:NASDAQ) to an Underperform from a Market Perform due to the company's current "all-time high valuation" in a "stock picker's space."
Enphase produces microinverters and batteries for photovoltaic (PV) systems. "The stock has become a crowded trade, as can be seen from its highest-ever revenue multiple, and earnings per share and cash flow per share valuations are at levels indicative of peak multiples on peak earnings," the analyst added.
Molchanov explained that Enphase's stock doubled since the start of 2019, compared to 82% growth in all of 2018. It has never traded at as high a multiple as it is now, 2.4x revenue, in its seven years as a publicly traded entity. In comparison, SolarEdge, an indirect comparable but the only relevant one, is trading at half the multiple of Enphase, at 1.2x forward revenue.
The last time Enphase came close to 2.4x, which was in mid-2014, it subsequently fell to less than 1x within a year's time. "We are not predicting anything quite so drastic, but it is important to underscore the unprecedentedly high valuation," clarified Molchanov.
The last time Enphase's gross margin grew 30%, a price war between the company and SolarEdge occurred, which had deleterious effects on the former, ultimately taking its gross margin down to 20%. The company did, however, subsequently turn around.
Molchanov noted a similar situation, but one less dramatic, could occur again. While Enphase's product is improved, competitors are active and Huawei's product could eventually enter the U.S. market. "Commoditization across the PV value chain is relentless," he indicated.
As such, Raymond James is wary that Enphase cannot sustain management's margin target over the medium term. The financial services firm models Enphase's gross margin for 2019 and 2020 in the low-30% range, as it was in Q3/18 and Q4/18, but "our bias would be to the downside, especially for 2020," noted Molchanov.
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Disclosures from Raymond James, Enphase Energy Inc., March 19, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
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