Enphase Energy: Bet Big On The Future
Summary
- ENPH's share price is breaking out higher.
- Cash infusion and product innovations are driving investor sentiment higher.
- I am buying the stock with a tight stop-loss point.
Enphase Energy (NASDAQ:ENPH) is breaking out higher on stronger fundamental guidance. The company fortified its balance sheet in recent quarters, allowing it to be better positioned to invest in its future. There are a number of interesting technologies in its pipeline, which could fuel its share price higher in the coming years. Due to the speculative nature of the company, however, using price action to determine investor sentiment is key. I am buying stock in the name, with a tight stop-loss point should I be proven incorrect.
Price Action
ENPH's price action is being driven largely by improving investor sentiment, signaling that following the charts is essential in this situation. On both the short- and long-term time frames, ENPH looks bullish. On its long-term chart, it is bottoming after years of trending lower. Over the last few months, the company's share price looks to have reversed course.
On its shorter-term chart, the break above $3.4 was significant as this level had acted as strong resistance in recent months. The consolidation since November 2017 and the subsequent break higher on strong earnings results are positive signs for shareholders. With the company trading higher largely on sentiment, however, I am placing a tight stop-loss position at $2.9. Should investor sentiment reverse, pushing its share price lower, I will exit the position having my thesis proven incorrect.
Source: Trading View
Fundamental Narrative
Investor sentiment continues to grow around ENPH as it solidifies its balance sheet and looks to roll out a strong product in coming years. In the most recent quarter, the company showed a cash balance of $29.1 million, recently closing a $20 million private equity investment, according to management. This additional liquidity will allow it to grow its market share as well as accelerate its cost savings initiatives. Moreover, management sharpened its focus on improving AR/AP and inventory management business processes to improve its cash conversion cycle.
Balance sheet management is a huge step forward for the company, aiding in its future growth prospects. Additionally, ENPH is looking to roll out its IQ 8 in coming years, which could lead to a large revenue windfall.
One of the solar industry's biggest challenges is its grid-tied. This means that if the grid is failing, while the sun is still shining, there will be no production out of a customer's solar system. To address this limitation, ENPH has invented microinverter technology that is grid-agnostic, eliminating this issue.
IQ 8 will therefore allow one to have a system that will continuously provide energy, regardless of the presence or absence of the grid that is solar during the day and storage at night. They are in essence creating a system that is referred to as always on.
Although IQ 8 will not be available until 2019, enthusiasm for the product is growing for many investors. Within IQ 8, ASIC represents the brain of the microinverter. Management has stated that the ASIC is fully functional, demonstrating the feasibility of Ensemble technology. The ASIC has five million gates and is made in 55-nanometer state-of-the-art technology at TSMC (TSM) enabling very high speed digital signal processing, according to management.
With IQ 8 representing innovative technology within the solar space, demand for the product should remain elevated until its release next year. Below are both ENPH's revenue and earnings per share. Over the last few years, revenue has declined, with EPS flat-lining. This has weighed on the company's share price, but with the development of a private equity cash infusion and innovative new technologies, investor sentiment could continue to increase in the coming quarters.
Conclusion
ENPH is breaking out higher on stronger fundamental guidance. The company fortified its balance sheet in recent quarters, allowing it to be better positioned to invest in its future. There are a number of interesting technologies in its pipeline, which could fuel its share price higher in the coming years. Due to the speculative nature of the company, however, using price action to determine investor sentiment is key. I am buying stock in the name, with a tight stop-loss point should I be proven incorrect.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are long ENPH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (18)
Maybe the TRUMP tarifs will soon end the recovery of Enphase....
