There's Reason For Concern Over Enphase Energy, Inc.'s (NASDAQ:ENPH) Massive 28% Price Jump

Enphase Energy, Inc. (NASDAQ:ENPH) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 43% over that time.

After such a large jump in price, Enphase Energy's price-to-earnings (or "P/E") ratio of 38.8x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Enphase Energy certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Enphase Energy

Keen to find out how analysts think Enphase Energy's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Enphase Energy?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Enphase Energy's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.6% last year. This was backed up an excellent period prior to see EPS up by 203% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. That's shaping up to be similar to the 11% each year growth forecast for the broader market.

In light of this, it's curious that Enphase Energy's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Enphase Energy's P/E

Enphase Energy's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Enphase Energy currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Enphase Energy with six simple checks on some of these key factors.

If you're unsure about the strength of Enphase Energy's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.