We have had some welcome rain and that should cause some less sweating what might happen in the Wineries and our other water based businesses in Sonoma County. That is some great news! I hope you are all staying dry.
As I prepare for my Webinar next week on Systemizing Your Business, I just got an RFP from the Santa Rosa Chamber of Commerce for Workshops for Small Business Week in May. I plan on submitting several and if you have a favorite topic that you would like to see, just let me know!
I posted about Calix and Cyan over the past couple of weeks. But I feel that I should say something about Enphase – A Petaluma Company in the Solar Power Business. I know lots of people there from my AFC days and they are growing here in the North Bay. They recently posted their Q4 results and had their conference call. They were Cash Flow Positive in Q4, which is a healthy sign for the business. This means that the company has reached a level of sustainability.
However if you look at the company, you might be puzzled about its stock price. The company has revenue of about $250M per year and a Market Cap of about $360M. That is a Price to Sales Ration of about 1.4. That valuation is not particularly high and says people are unsure of where the company is going. Given the popularity of Solar Power the growth in the business, one might wonder why.
The reason is Gross Margins – The Profit Remaining from the Sales Price minuses the Cost to Produce the Product. Right now, Enphase has exceeded 30% Gross Margins for the first time. That does not give the company a lot of room to spend on the rest of the company and remain profitable. One would like to see at least 5% Net Margin (which is after Operating Expenses are removed). That means that one would need 25% or less expenses on the rest of the business. This means that things are tight and it will be a challenge to remain profitable. There is seasonality in the business and Q1 will not be Cash Flow Positive, but that is part of the plan. Given that, Wall Street will be okay with it.
But I want to throw something else out on the table. There is LOTS of R&D being deployed in the Energy Sector across many technologies in many directions. As a consumer, that says to me that Energy prices are going to be low going forward. At least some of these initiatives will work and become a next wave. As an investor, I can not judge which things will win and won’t win. Unless you are studying all the alternatives, I suspect that you can’t judge as well.
If we go back to the understanding that 90% of all companies fail, I urge caution in investing in these new companies. Even with great management and technology, they might lose to an alternative out of left field. I am not suggesting you don’t invest, but be careful. Don’t place a single bet and expect many of them to be losers. I am not trying to say that Enphase is going to fail. What I am saying is that their business is highly competitive and it won’t be easier 1 year from now or 5 years from now. Caveat Emptor!
Anyway have a great day and I will post on a general business topic on Friday!
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