One of the biggest losers as of today's afternoon session is semiconductors company Enphase Energy, whose shares are down -5.9%, underperforming the Nasdaq by -6.0%.
At $171.04, ENPH is 33.54% below its average analyst target price of $257.37.
The average analyst rating for the stock is buy. ENPH lagged -6.0% behind the S&P 500 index today, and by -23.0% over the last year, returning -5.9%.
Enphase Energy's trailing 12 month P/E ratio is 49.3, based on its trailing EPS of $3.47. The company has a forward P/E ratio of 23.2 according to its forward EPS of $7.37 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Enphase Energy's PEG ratio of 1.72 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on ENPH's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 2,330,853 | 1,356,258 | 41.81 | 4.21 |
| 2021-12-31 | 1,382,049 | 827,627 | 40.12 | -10.21 |
| 2020-12-31 | 774,425 | 428,444 | 44.68 | 26.07 |
| 2019-12-31 | 624,333 | 403,088 | 35.44 | n/a |
- Average gross margin: 40.5%
- Average gross margin growth rate: 4.2%
- Coefficient of variability (higher numbers indicating more instability): 9.6%
We can see from the above that Enphase Energy business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Enphase Energy's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 744,817 | -46,443 | 698,374 | 133.16 |
| 2021-12-31 | 352,028 | -52,508 | 299,520 | 52.99 |
| 2020-12-31 | 216,334 | -20,558 | 195,776 | 57.53 |
| 2019-12-31 | 139,067 | -14,788 | 124,279 | n/a |
- Average free cash flow: $329.49 Million
- Average free cash flow growth rate: 54.0%
- Coefficient of variability (the lower the better): 77.8%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ENPH is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Enphase Energy's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 24, so it's likely that equity investors are over-valuing the company's assets.
As of first quarter of 2023, Enphase Energy is likely fairly valued because it has an inflated P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with an upwards trend. The stock has mixed growth prospects because of its weak operating margings with a stable trend, and an inflated PEG ratio. We hope this analysis will inspire you to do your own research into ENPH's fundamental values -- especially their trends over time.
