Stock Analysis & Ideas

ENPH vs. RUN: Is the Market Right about These Solar Stocks?

Story Highlights

There is more than one approach to the solar industry, but some business models are sustainable, while others aren’t. These two solar energy stocks are opposites in every way and have completely different valuation multiples, which look justified.

Solar energy stocks have been hot in recent years, especially amid the growth of environmental, social, and governance (ESG) investing. However, not all solar stocks are created equal. In this piece, we used TipRanks’ Comparison Tool to evaluate two solar energy stocks. As you can see, Enphase Energy (NASDAQ: ENPH) and Sunrun (NASDAQ: RUN) are polar opposites in terms of their yearly performance. Enphase is up more than 40%, while Sunrun has tanked, losing more than 63% of its value. Nonetheless, analysis of their business models suggests that the market views these two correctly.

The State of the Solar Energy Industry

News about the solar energy industry has been mixed lately. Last week, the Houston Business Journal highlighted new challenges facing the industry. While commercial solar capacity in the U.S. has grown nearly tenfold over the last decade, solar energy isn’t immune to the inflationary pressures that have driven everything from groceries to gas and electricity through the roof.

Existing tariffs on components and equipment combined with the global supply issues have dramatically increased the cost of the materials, components, and equipment needed to generate solar power. Those increases have, in turn, raised the per-watt cost of solar energy, causing some businesses to question the economics of adding solar panels. As a result, some developers have paused or canceled projects.

What’s worse is that a study conducted by Rystad Energy found that the soaring costs for solar equipment may cause more than half of the 90 gigawatts of new solar developments planned for this year to be postponed or canceled.

Other headlines have been positive for solar energy, like those showcasing how solar power withstood hurricanes Fiona and Ian. Additionally, it seems that inquiries about solar panels skyrocketed in Australia after an energy company executive predicted a 35% increase in electricity costs.

Enphase Energy (ENPH)

One of the most important things to point out about Enphase is that it’s profitable while Sunrun is not, which is one reason its valuation is so much higher. One downside for 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 appears appropriate at this time, but only for those seeking a long-term investment.

The company makes microinverters used in solar panels and has started to cross-sell them into additional products like electric vehicle chargers and its IQ solar energy storage device. Thus, its business model is completely different from Sunrun’s. However, as with any industry, some approaches are more profitable than others, and that’s what we’re seeing with Enphase.

The company trades at a forward P/E ratio of around 62x (for 2022) and a forward P/S ratio of around 15x, and it’s easy to see why the market values Enphase at so much more than Sunrun. The company has enjoyed sizable revenue growth of 78.5% in 2021 and an attractive gross margin in the 40% range for 2020, 2021, and the last 12 months.

It became profitable in 2019 and has maintained its profitability since then. The last several quarters have shown steady growth in revenue and net income as well, demonstrating Enphase’s continuing strength, and its exposure to Europe during the current energy crisis there presents further opportunities. Its revenue from Europe surged 69% quarter-over-quarter, according to the latest earnings release.

While Enphase Energy does look expensive, these earnings and revenue numbers suggest its dominance could be here to stay.

What is the Price Target for ENPH stock?

Enphase Energy has a Strong Buy consensus rating based on 12 Buys, four Holds, and zero Sell ratings over the last three months. At $289.64, the average price target for Enphase Energy implies upside potential of 14.1%.

Sunrun (RUN)

On the other hand, Sunrun’s valuation is minuscule compared to Enphase’s, at a forward P/S of about 2x. Wall Street has re-rated most unprofitable companies this year, and Sunrun was no exception. The company was profitable from 2017 through 2019 but started to lose money in 2020 despite its robust revenue growth, which is a red flag. As a result, a bearish rating looks appropriate for Sunrun.

While Enphase makes money primarily by selling microinverters, Sunrun makes most of its money through solar leases by installing panels on its customers’ buildings and then leasing those panels back to them for a monthly fee.

However, accounts like one from a Bloomberg reporter in February 2019 suggest this business model may not be sustainable because it doesn’t sound beneficial for consumers, who pay more for their electricity. Sunrun also makes some money selling solar systems to its customers.

The company finances the installations of its leased panels by taking on debt and then raising capital from tax-equity investors, which is why it has so much debt and continues to bleed cash. In recent years, Sunrun has burned through more and more cash each year, with its free cash flow drifting 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 $2.44 billion in total assets and $1.99 billion in total liabilities as of the most recent quarter, compared to Sunrun’s $17.8 billion in assets and ~$10 billion in liabilities.

Sunrun only has so many assets because it owns the solar panels it installed on most of its customers’ buildings, and it will keep taking on more debt whenever it installs more panels. Thus, the bull argument for Sunrun’s balance sheet doesn’t appear to hold water.

What is the Price Target for RUN Stock?

Sunrun has a Strong Buy consensus rating based on 14 Buys, two Holds, and zero Sell ratings assigned over the last three months. At $49.00, the average price target for Sunrun implies upside potential of 150%.

Conclusion: Long-Term Buy on ENPH, Run from RUN

There’s no denying that Enphase Energy and Sunrun approach the solar energy industry from two different perspectives. It also seems clear that Enphase’s approach is sustainable, while Sunrun’s is not.

At some point, perhaps during this time of skyrocketing inflation, when consumers are pinching pennies, many or even most of those leasing solar panels from Sunrun will realize they’re losing money on the arrangement. The company could also run into issues with all that debt it incurs as well. Sunrun’s gross margins also leave much to be desired, running in the 14% range to Enphase’s margins closer to 40%.

While Enphase is a risky bet now from a valuation standpoint, it looks like a long-term solar powerhouse, while Sunrun just looks risky, period.


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