Solar energy stocks have been hot in recent years, especially against the backdrop of the growth in environmental, social and governance (ESG) investing. However, not all solar stocks are created equal. In this article, we used TipRanks’ comparison tool to evaluate two solar energy stocks. As you can see, Enphase Energy (NASDAQ: ENPH) and Sunrun (NASDAQ: RUN) are poles apart in terms of annual performance. Enphase is up over 40%, while Sunrun has fallen, losing over 63% of its value. Nonetheless, analysis of their trading patterns suggests that the market is viewing them correctly.
The State of the Solar Power Industry
News regarding the solar energy industry has been mixed lately. Last week the Houston Business Journal highlighted the new challenges facing the industry. While commercial solar capacity in the United States has increased nearly tenfold over the past decade, solar power is not immune to the inflationary pressures that have driven everything from groceries to gas and oil. electricity through the roof.
Existing tariffs on components and equipment, combined with global supply issues, have dramatically increased the cost of materials, components and equipment required for solar power generation. These increases have, in turn, increased the cost per watt of solar power, causing some companies to question the economics of adding solar panels. As a result, some developers have suspended or canceled projects.
Worse still, a study by Rystad Energy found that soaring solar equipment costs could cause more than half of the 90 gigawatts of new solar developments planned for this year to be postponed or canceled.
Other headlines were positive for solar power, such as those showing how solar power withstood hurricanes Fiona and Ian. Additionally, it appears that inquiries about solar panels have skyrocketed in Australia after an energy company executive predicted a 35% rise in electricity costs.
Enphase Energy (ENPH)
One of the most important things to point out about Enphase is that it is profitable while Sunrun is not, which is one of the reasons why its valuation is so much higher. One of the downsides of Enphase Energy is its high valuation, which makes it risky. However, for investors with a long-term investment horizon, it may be worth the risk. Thus, a bullish view seems appropriate at this time, but only for those looking for a long-term investment.
The company manufactures microinverters used in solar panels and has begun selling them in additional products such as electric vehicle chargers and its IQ solar energy storage device. Thus, its business model is completely different from that of Sunrun. However, like in any industry, some approaches are more cost-effective than others, and that’s what we’re seeing with Enphase.
The company is trading at a forward P/E of around 62x (for 2022) and a forward P/S of around 15x, and it’s easy to see why the market values Enphase much more than Sunrun. The company has seen considerable revenue growth of 78.5% in 2021 and an attractive gross margin of around 40% for 2020, 2021 and the last 12 months.
It became profitable in 2019 and has maintained its profitability since then. Recent quarters have also seen steady growth in revenue and net income, demonstrating Enphase’s continued strength, and its exposure to Europe during the current energy crisis presents new opportunities. Its revenue in Europe jumped 69% quarter-on-quarter, according to the latest earnings release.
Although Enphase Energy looks expensive, these earnings and revenue numbers suggest its dominance may be here to stay.
What is the target price for ENPH stock?
Enphase Energy has a strong buy consensus rating based on 12 buys, four holds and no sell ratings over the past three months. At $289.64, the average price target for Enphase Energy implies 14.1% upside potential.
On the other hand, Sunrun’s valuation is tiny compared to Enphase, with an advanced P/S of around 2x. Wall Street has reassessed most unprofitable companies this year, and Sunrun was no exception. The company was profitable from 2017 to 2019, but started losing money in 2020 despite its strong revenue growth, which is a red flag. Accordingly, a bearish rating seems appropriate for Sunrun.
While Enphase makes money primarily by selling microinverters, Sunrun makes most of its money through solar leases by installing panels on customers’ buildings and then renting those panels to them for a fee. monthly.
However, stories like that of a Bloomberg reporter in February 2019 suggest that this business model may not be sustainable as it does not appear to benefit consumers, who pay more for their electricity. Sunrun also makes money by selling solar systems to its customers.
The company finances its leased panel installations by going into debt and then raising capital from tax equity investors, which is why it has so much debt and continues to bleed money. In recent years, Sunrun has been burning more and more cash every year, with its free cash flow slipping further into the red. The company reported -$2.5 billion in free cash flow in 2021, compared to -$1.3 billion the year before.
Another difference between Enphase and Sunrun that should be addressed is their balance sheets. Enphase had total assets of $2.44 billion and total liabilities of $1.99 billion last quarter, compared to Sunrun’s $17.8 billion in assets and about $10 billion in liabilities.
Sunrun only has so many assets because it owns the solar panels it has installed on most of its customers’ buildings, and it will continue to go into debt every time it installs more panels. Thus, the bullish argument of Sunrun’s balance sheet does not seem to hold water.
What is the price target for RUN Stock?
Sunrun has a strong buy consensus rating based on 14 buys, two takes, and no sell ratings given in the past three months. At $49.00, the average price target for Sunrun implies 150% upside potential.
Conclusion: Long-term buy on ENPH, Run from RUN
There is no denying that Enphase Energy and Sunrun approach the solar energy industry from two different angles. It also seems clear that Enphase’s approach is sustainable, while Sunrun’s is not.
At some point, perhaps during this period of soaring inflation, when consumers are pinching pennies, many, if not most, of those renting solar panels from Sunrun will realize that they are losing the money on the arrangement. The company could also run into problems with all the debts it incurs. Sunrun’s gross margins also leave a lot to be desired, ranging from around 14% to Enphase’s margins closer to 40%.
While Enphase is now a risky bet from a valuation perspective, it looks like a long-term solar power plant, while Sunrun just looks risky, period.