We recently wrote an article on Enphase Energy (NASDAQ:ENPH) where we concluded that we would watch the stock from the sidelines. Since then, the stock has dropped 13.59%, making it more attractive. However, we wanted to see if it is attractive enough. Therefore, in this article, we will be revisiting the valuation. Feel free to check out our previous article for a more detailed analysis of the industry and growth catalysts.
Previously, we used a regression model to value Enphase. In this article, we will calculate the company's potential intrinsic value based on the current market conditions and expectations.
We will begin by looking at the expected growth. Analysts forecast that earnings will reach $8.77 per share in 2030. This is up substantially from the current trailing 12 months EPS of $1.41 ($1.27 fully diluted).
Next, we need to figure out what the cost of equity is. At the time of this writing, the risk-free rate is 1.34% and the equity risk premium is 4.7%. In addition, Enphase has a beta of 1.14. Thus, the cost of equity is as follows:
1.34 + 1.14(4.7) = 6.698%
In addition, we need to determine a perpetual growth rate for the company. This is the growth rate that the company will grow at "forever". A reasonable assumption is to set it to the expected nominal GDP growth which we set to 3.52%. We arrived at this number by calculating the expected GDP growth rate in 2026 (the farthest out the forecast goes) that is forecasted by Statista.
Putting these numbers together, the justified price for Enphase in 2030 is:
8.77 / (0.06698 - 0.0352) = $275.96 per share
Now, before investors rush to buy more shares, we're not done yet. This is the fair price of Enphase in 2030 dollars. We still need to discount the future value to the present value. There are approximately 8.25 years left from the time of this writing until December of 2030. Therefore, the present value for Enphase's stock is as follows:
275.96 / 1.06698 ^ 8.25 = $161.64 per share
Enphase is essentially trading at fair value.
When interpreting the valuation, there are a few important notes investors must consider. To begin with, this valuation is based on current market conditions and expectations. The market conditions are the risk-free rate and the equity risk premium. These values are always changing and a higher discount rate leads to a lower valuation.
In addition, the chances of the 2030 forecast being right are almost zero. As a result, the growth expectations are likely to change each quarter as newer and more relevant information comes out. The changes in expectations can have a material impact on the valuation of a stock and should be monitored closely by investors. Since the current multiple is very high at 124.48 times earnings, the stock is vulnerable to large drawdowns if growth expectations aren't met.
In our opinion, Enphase is a superior solar company as we alluded to in our previous article. Although the valuation has gotten better since our last article, we would still prefer a larger margin of safety and will continue to watch from the sideline.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.