Enphase Energy (ENPH) stock has fallen hard over the past month with the market seemingly unimpressed by its third-quarter financial results. The company has faced some headwinds in the form of lower energy prices in Europe and other macroeconomic challenges. Many of these challenges will likely be short lived, but given the high multiples at which the company trades, investors have been spooked. As such, I’m Neutral on ENPH stock, wary that short-term challenges may persist, while acknowledging the strong consensus growth forecasts.
What is Enphase Energy?
Before diving deeper into my Neutral outlook, let me provide an overview of Enphase Energy. It is an American energy technology company headquartered in Fremont, California. Founded in 2006, the company rose to prominence as the first company to successfully commercialize solar micro-inverters. This is technology that convert DC power from solar panels into grid-compatible AC power.
Enphase has grown into a leader in solar micro-inverters, battery energy storage, and electric vehicle charging stations. As of 2022, the company has shipped over 48 million microinverters and deployed more than two million systems across 140 countries.
Today, the company holds a 48% market share for residential installations in the U.S. Enphase has expanded its product line to include home energy storage solutions and continues to innovate in the renewable energy sector.
Enphase Earnings Disappoint
Poor financial results are a main reason I am Neutral on ENPH stock. While Enphase might be operating in a rather exciting part of the energy market, the company reported disappointing Q3 results on October 22, with adjusted earnings and revenues falling short of analyst expectations.
Earnings per share (EPS) came in at $0.65, which was $0.13 below estimates. The company’s net income decreased to $45.76 million ($0.33/share) from $113.95 million ($0.80/share) year-over-year. Gross margins declined to 46.8% from 47.5%, while non-GAAP gross margins fell to 48.1% from 48.4% a year ago. Europe was a particularly concerning geography with revenues falling 15% quarter-over-quarter due to softening demand.
U.S. revenues were a bright spot, rising 43%. Meanwhile, global microinverter shipments plummeted 55% year-over-year to 1.73 million units. Management’s fourth quarter guidance also disappointed, with projected revenues of $360-400 million falling below the $433.5 million analyst consensus. The weak results and outlook resulted in rapidly shifting sentiment to the downside, with the stock dropping almost 9% in after-hours trading.
Fighting Headwinds
Strong headwinds are another reason I remain Neutral on Enphase Energy. There are many reasons why Enphase didn’t perform well in Q3, though some of these are likely to be short term. For example, the decrease in European demand was largely attributed to a sharp decline in power prices, reducing the urgency for solar installations. This situation is likely cyclical and could reverse as energy prices stabilize or increase.
It could be argued that the current macroeconomic pressures affecting growth in Europe and other Western markets are not permanent conditions, and as economic situations improve, demand for solar solutions could rebound.
It was also noted that a significant U.S. customer going bankrupt impacted revenues. While this is a one-time event, it may still have a lasting impact on demand. Additionally, the lower Q4 guidance due to significant battery shipments in Q3 is a short-term inventory management issue rather than a fundamental problem with long-term demand.
Enphase Valuation
There were several positives to take from the Q3 results as well, including a strong showing in the U.S. where revenue surged 43% quarter-over-quarter, showcasing strength in the company’s home market. This fact reinforces my Neutral stance on ENPH stock. What’s more, Enphase was able to sustain a strong 48.1% gross margin during the quarter. Looking ahead, the company continues to innovate, with the upcoming fourth-generation IQ Battery launch in early 2025 promising reduced installation costs.
For long-term investors, the current valuation may present a buying opportunity, as Enphase is well-positioned to benefit from the growing renewable energy sector. Looking at grow forecasts, it appears that most analysts believe the company is facing only temporary challenges, and that Enphase will grow earnings at an impressive 31.4% annually over the medium term.
So, while Enphase may look expensive at 37.3x forward earnings, the price-to-earnings-to-growth (PEG) ratio is a more palatable 1.18. This PEG ratio represents a 38% discount to the information technology sector as a whole, while the aforementioned forward price-to-earnings ratio is a 54% premium.
Is Enphase Energy Stock a Buy?
Enphase stock has a consensus Moderate Buy rating based on 13 Buy, 11 Hold, and three Sell ratings assigned by Wall Street analysts in the past three months. The average ENPH price target of $105.20 implies 25.9% upside potential.
Read more analyst ratings on ENPH stock
Conclusion
Investors are understandably disappointed by the Q3 results of Enphase Energy, which were impacted by a series of short-term challenges. It’s also never good to see guidance revised to the downside. Of course, some investors will see this as an opportunity, with the firm trading at lower multiples than we’ve seen for some time. This will definitely suit people who are content to Buy and Hold energy and solar stocks for the long term. Personally, I’m unconvinced and feel the stock is still quite expensive. For these reasons, I remain Neutral on ENPH stock.
