U.S.-based solar energy specialist Enphase Energy (ENPH) has struggled with high interest rates leading to a sharp rise in borrowing costs. Year-to-date, ENPH stock has declined by 11.32%. However, the Federal Reserve’s upcoming monetary policy decision could power up ENPH stock. The company is also optimistic about the solar market’s recovery this year.
The reasoning is simple: lower interest rates could reduce the cost of financing solar systems. This, coupled with Enphase’s strong market position, could present an ideal opportunity for investors to consider ENPH stock. As a result, I remain bullish on this renewable energy company.
The Ebb and Flow of ENPH Stock
The chart below highlights the ebb and flow in ENPH stock over the last five years. During the early days of the COVID-19 crisis, shares initially plunged amid widespread panic. However, they soon surged to reach a peak valuation in late 2022. Since then, Enphase has experienced a sharp decline in its market value.
Much of the dynamics can be traced to monetary policy and the real estate market. Early in the pandemic, the Federal Reserve’s monetary stimulus lowered interest rates, creating a significant opportunity for homebuyers. As new homeowners sought to upgrade their properties, demand for solar energy systems surged. This directly benefited Enphase’s core business and contributed to the sharp rise in ENPH stock.
However, the Fed recognized that the influx of cheap money had become excessive. To address this, it aggressively started raising the benchmark interest rate. Although ENPH stock did not immediately suffer, as shown by its rise into late 2022. The effects of these rate hikes eventually became unavoidable.
It’s not just the higher rates that increase the cost of financing solar systems; the broader business ecosystem also contracts. This contraction is a key reason behind widespread layoffs. Consequently, large-scale job losses impact the residential solar sector, further adding to the volatility of ENPH stock.
Is There an Opportunity Amidst Value Erosion?
Despite the decline in ENPH stock, a potential opportunity arises. Essentially, Enphase is contextually undervalued. A thorough explanation is needed to understand this valuation perspective.
Currently, ENPH stock trades at 11.34 times trailing-year revenue, which might seem exceptionally high. In comparison, the average price-to-sales ratio in the solar industry is 2.19 times, suggesting that Enphase appears significantly overvalued.
Financially, a big problem is the erosion of demand due to the rise in interest rates. Enphase generated $2.29 billion in revenue for Fiscal 2023. But it represents a drop of nearly 39% compared to analysts average forecast of $1.4 billion in sales for this year. From this standpoint, ENPH stock seems to be more of a value trap than a value play.
However, it’s important to note that analysts expect a gradual recovery starting in Fiscal 2025. The consensus forecast for next year is $2.02 billion in sales, with the high-side estimate reaching $2.33 billion. For the years 2026 through 2028, Enphase is projected to achieve sales of $2.41 billion, $3.15 billion, and eventually $3.79 billion.
Averaging the projected revenue for 2026 through 2028 results in approximately $3.12 billion. With 135.42 million shares outstanding currently and a compound annual growth rate of 2.47% over the past four years, the average number of shares during this period is expected to be around 142.2 million.
This yields an average revenue per share of $21.94. Dividing this by Friday’s closing price of $116.39 gives a projected price-to-sales ratio of 5.3x. This ratio reflects the anticipated market price relative to the fundamentals in a post-Biden administration context, characterized by a post-pandemic normalization regardless of the president.
Now, it’s true that a multiple of 5.3x is still high relative to the underlying industry. However, what must be kept in mind is that from 2026 to 2028, Enphase’s revenue is projected to expand at 23.44% on average. This growth rate is significantly higher than the 6% compound annual growth rate (CAGR) expected for the global solar power industry between 2024 and 2032, according to Fortune Business Insights.
Therefore, assuming that the aforementioned projections hold true, ENPH stock – when considering the underlying leadership in the market – is, as stated earlier, contextually undervalued.
Solar Industry’s Strong Fundamentals
Fundamentally, the core catalyst for the expected growth in the solar industry is the Fed’s potential dovish pivot. With the latest rumblings in the market, analysts are expecting an interest rate cut. In the words of TipRanks’ Paul Hoffman, such a move would be a gift for corporate finances.
For many businesses, this represents an opportunity to enhance their finances by borrowing at lower rates. For ENPH stock, a reduction in the cost of financing solar panels and systems should lead to an increase in its valuation.
Finally, it’s worth noting that in 2019, the average sales multiple for ENPH stock was just over 5x. If the projections for the post-Biden and post-COVID normalization years hold true, Enphase at its current market price effectively returns to that level. In other words, for bold contrarians, ENPH offers a chance to essentially turn back the clock.
Is ENPH Stock a Buy, According to Analysts?
Turning to Wall Street, ENPH stock has a Moderate Buy consensus rating based on 17 Buys, six Holds, and three Sell ratings. The average ENPH price target is $123.77, implying a 6.34% upside potential.
See more ENPH analyst ratings.
The Takeaway: ENPH Stock Poised for Rebound
Enphase Energy has experienced significant market fluctuations due to the policy response to the COVID-19 crisis. However, a shift towards a dovish monetary policy could be the fuel that ENPH stock needs to recover. Analysts project strong, sector-leading growth for Enphase in the post-Biden years, which are expected to be marked by a full normalization from the pandemic. Given the anticipated business expansion, ENPH currently appears to be undervalued.
