Shareholders of Enphase would probably like to forget the past six months even happened. The stock dropped 38.5% and now trades at $38.31. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Enphase, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Enphase Not Exciting?
Even though the stock has become cheaper, we're swiping left on Enphase for now. Here are three reasons you should be careful with ENPH and a stock we'd rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Renewable Energy company because there’s a ceiling to what customers will pay.
Enphase’s units sold came in at 1.53 million in the latest quarter, and they averaged 28.9% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Enphase might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Enphase’s operating margin decreased by 12 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 11.7%.
3. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Enphase, its EPS and revenue declined by 27.3% and 27.2% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Enphase’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
Enphase isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 15.4× forward P/E (or $38.31 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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