Should You Pick Enphase Stock Over First Solar?

FSLR: First Solar logo
First Solar

Solar stocks have done very well over the last year or so driven by low-interest rates, strong regulatory support, and the recent elections in the U.S. which saw the Democratic party – which is seen as pro-renewable energy – regaining a government trifecta. The best performing solar name by far was Enphase Energy (NASDAQ:ENPH), a producer of solar microinverters. The stock gained a whopping 7x over the last year and the company is valued at about $25 billion. Enphase trades at 37x trailing Revenue, compared to First Solar (NASDAQ:FSLR) – one of the largest and most established solar panel manufacturers- which trades at a much more reasonable 3x trailing Revenues. Is this justified? Which stock could be the better pick for investors looking to gain an upside from the long-term growth in the solar market? Let’s take a closer look at the two companies, their financial performance, and outlook to decide. See our interactive analysis on Enphase Energy Vs. First Solar for a detailed overview of how the two companies compare.

Overview & Financials

Enphase is best known for its microinverters that connect to individual solar panels and convert the direct current (DC) produced by the panel into the alternating current (AC) used by the grid and homes. The company also offers related tools to track energy production and monitor PV systems. The company largely caters to the residential and commercial solar market. First Solar, on the other hand, produces thin-film solar panels that are primarily used in utility-scale solar farms.

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Enphase Revenues have grown from about $286 million in 2017 to about $720 million over the last 12 months, a growth of about 151%. In comparison, First Solar’s Revenues have grown from about $2.9 billion to $3.5 billion over the same period, a growth of about 21%. Enphase’s operating margin was 15.2% for the most recent twelve-month period, which is higher than First Solar’s operating margin of 4% over the same period. Enphase’s margins have also been steadily trending higher, rising from around -14% in 2017 to about 15% over the last 12 months, while First Solar’s margins have been more volatile, declining from 6% in 2017 to -5% in 2019 and rising again to about 4% over the last 12 months.

Enphase’s High Valuation, Overdependence On U.S. Is A Concern

Looking purely at fundamental performance, Enphase looks more attractive compared to First Solar, with stronger revenue growth and higher and more consistent margins. Longer-term growth could also be better, considering that components such as inverters and related power electronics systems are somewhat less commoditized compared to solar panels, given that they control the photovoltaic power system and have a software component.

However, Enphase’s stock has significant price risk, trading at about 37x trailing revenue vs 3x for First Solar. That’s even higher than many high growth software names and it’s not clear that the company will be able to lock in users and generate recurring revenue streams. Enphase is also highly dependent on the U.S. residential solar market (over 80% of Revenue over 2020 came from the U.S.), which hasn’t been growing too quickly. Enphase’s offering also faces competition from the likes of SolarEdge which offers a more cost-effective system that uses power optimizers and a central single-phase inverter.

Although First Solar plays in the more commoditized segment of the solar market, it has been carving out a niche for itself in the utility-scale market with its property Cd-Te panels. The utility-scale solar market is also much larger than the residential market, with U.S. utility-scale solar installations projected at 14.2 GW for 2020,  compared to roughly 3 GW for the residential market, and growth in utility solar has also been more consistent. [1] While First Solar’s stock has also soared in recent quarters, making it look expensive versus historical valuations,  it might still be the better value bet compared to Enphase.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with around 130% return since 2016, versus about 70% for the S&P 500. Comprising companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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  1. Solar Market Insight Report 2020 Q4, SEIA []