It Might Be Time To Buy Back This Sold-Off Solar Stock

The Raymond James investment firm believes that Enphase, the beat-down telecoms company, is worth investing in because its European business is growing rapidly.

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The brokerage firm of Pavel Molchanov upgraded the solar stock from market performance to outperform with a price target of $225, suggesting that the stock will probably rally 22.5% from where it closed on Friday to its new level of $225.

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"There is a turn positive on the Enphase situation for the first time in almost two years,” he wrote in a note to clients on Monday. "This is not only the result of opportunity in the market but represents an important theme in the solar industry."

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Molchanov believes Enphase is an opportunity in light of the 30.7% decline in Enphase shares seen in its stock during this year, although he is trying to avoid what he called the broader sector's risk-off trade.

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By comparison, he said many clean technology stocks have price-to-earnings multiples that fall somewhere between 20x and 30x, which is comparable to the 40x multiple that was seen in early 2021. Moreover, he said the market is back to reasonable multiples, specifically pointing to the 26x P/E multiple for 2024, which was down from 40 in early 2021.

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Despite the fact that Molchanov noted the trade still remains more crowded than others, he also added that the fact that it is one of the few clean technology stocks in the S&P 500 is part of the reason why that is the case.

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Moreover, he said that the company is now approaching a level of free cash flow yield of 4%, which makes a possible share buyback or dividend possible for the first time.

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Furthermore, Molchanov explained that Enphase's success in European markets has also contributed to the success of the company, which may be even more crucial to the company during a period when regulatory changes could occur in the California market. Enphase only accounted for one-fifth of its sales mix last year, whereas a third of the broader market is made up of California.

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It’s estimated that Enphase’s sales to Europe will reach 25% this year, which represents a 19% increase over 2021 (19% of Enphase sales), and will surpass 24% next year (25% in 2022). Molchanov pointed out that companies with a big European presence benefit from the country’s strong climate policy and its attention to energy security resulting from the Russian invasion of Ukraine.

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Molchanov emphasizes that even with tailwinds on the horizon, he's keeping an eye on how corporate costs and margins evolve over the next few years. He also noted that changes in competition may affect the company's performance in the short term.

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In the period before the bell, the stock rose by 1.2%.