3 Reasons Enphase Energy Is Not s Buy Despite Strong Q1 Earnings

Stock Market
  • Enphase Energy (ENPH) has reported strong Q1 earnings beating on both top and bottom lines
  • The company has made a 3-month rally of nearly 10% but this may come to an end soon
  • Shares are now overvalued and there are 3 core risks to place attention now
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Enphase Energy (NASDAQ:ENPH), a global solar technology company has outperformed Nasdaq for the past 5-days, the week ending on May 13. Nasdaq had losses of -2.80% while shares of Enphase Energy had gains of 4.84%.

This divergence in price between Enphase and Nasdaq is interesting to watch given the fact that Enphase has reported two consecutive strong quarters of record revenue. The sales growth is one of the most positive factors about Enphase but is the stock a Buy now?

I consider that ENPH stock is overvalued and not a Buy, for three main reasons. These are fundamental reasons supporting the idea that stock investing is not just about getting excited about some specific reasons, you should be focusing on the broader picture.

 Optimistic About Beating Top and Bottom Lines in Q1

Enphase Energy has reported a strong Q1 2022 earnings to report beating EPS and revenue estimates. EPS GAAP of $0.37 was a beat by $0.18 and revenue of $441.29 million was a beat by $7.63 million.

This was the second time the firm has reported record quarterly revenue. Back in February, Enphase had also reported a record quarterly revenue of $412.7 million. The question to ask now is whether this sales growth is enough to fuel a stock price rally. I argue that it is not.

What is the target price for ENPH stock?

The 1-year price target for ENPH stock is $226.28 signaling an upside potential of nearly 44% compared to the closing stock price of $157.79 on May 13.

This stock price seems to be very optimistic as Enphase shows a mixed picture now. Although there are gains of 33.25% for the past 1-year, the 1-month return is -16.97%. What this means is that the last two consecutive strong quarterly results have been unable to fuel a sustained rally.

Even with the 3-month rally that resulted in gains of 9.63%, the stock has losses of -13.75% year-to-date. One of the reasons that make me bearish on Enphase is its valuation.

Is ENPH stock overvalued?

Shares of Enphase Energy have a PE Ratio (TTM) of 134.40. This is the first warning sign that the stock is overvalued, as it is too high. Analyzing the financial ratios of the stock compared to the Information Technology sector, it is evident that Enphase trades now at a very large premium. The only ratio that is in favor of the company is PEG Non-GAAP (FWD) with a value of 1.16, versus the figure of 1.38 for the Sector median value.

In all other financial ratios, Enphase has a very large premium like the price/sales (FWD) ratio of 14.62 with a difference of 265.99% to the Sector median value of 2.81. Therefore, we can conclude that ENPH stock is now overvalued.

The second reason other than valuation to be bearish on the firm is its high level of debt. The D/E ratio of 3.89 is too high, and can result in very volatile earnings because of the additional interest expense.

Finally, the third reason is that Enphase in its first-quarter 2022 earnings report estimated that in the next quarter GAAP gross margin of 40.1% may decline to a range of 37.0% to 40.0%, and GAAP operating expenses to be within a range of $127.5 million to $130.5 million.

The operating expenses have been increasing both on a quarter-over-quarter and year-over-year basis and are expected to increase further in Q2 2022. That will harm the profitability.

Enphase Energy shows strong sales growth, but its shares are overvalued now, and given these three fundamental reasons it is not a Buy.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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