Sometimes stocks go up. Sometimes stocks go down. And sometimes they move sharply for no good reason.
That's been the case for shares of Enphase Energy (ENPH +5.98%) lately -- and it appears that investors will be subjected to more volatility this week. Despite the solar energy company delivering strong third-quarter 2019 operating results and beating Wall Street estimates on revenue and adjusted earnings, its stock fell by more than 10% in after-hours trading.
That shouldn't worry investors with a long-term mindset, however, especially after poring over the details. The business continues to expand its financial flexibility and position itself to capture significant value from important growth opportunities. Here's what investors need to know about the latest operating results.
Image source: Getty Images.
When besting Wall Street isn't enough
Enphase Energy achieved quarterly revenue of $180 million and adjusted earnings per share (EPS) of $0.30 in the third quarter, beating Wall Street expectations of $176 million and $0.25, respectively. So why would shares drop? Let's circle back to that question below after discussing other important developments.
The company exited September with $203 million in cash and generated $36.8 million in operating cash flow in the first nine months of 2019. It also made a conscious effort to grow inventory 50% from the second quarter of this year to put itself in position to respond to growing customer demand.
Most importantly, the microinverter leader is growing and bolstering its cash position while growing profits. Enphase Energy reported an operating margin of 18.7% during the third quarter, up from 13% in the second quarter. The business converted 10.7% of revenue into net income in the first nine months of 2019 -- quite an improvement from its money-losing ways of 2018.
|
Metric |
First Nine Months 2019 |
First Nine Months 2018 |
Change |
|---|---|---|---|
|
Revenue |
$414.3 million |
$223.8 million |
85% |
|
Gross profit |
$143.4 million |
$66.3 million |
116% |
|
Operating expenses |
$85.1 million |
$69.7 million |
22% |
|
Operating income |
$58.3 million |
($3.4 million) |
N/A |
|
Net income |
$44.5 million |
($12.3 million) |
N/A |
Data source: Enphase Energy.
Given the solid year-to-date performance and beat on quarterly revenue and earnings, why would shares of the renewable energy company drop? It may come down to safe-harbor revenue related to the investment tax credit (ITC) for solar energy projects.
Image source: Getty Images.
Is Enphase Energy getting punished for the ITC?
The ITC allows the developer of a solar project to claim 30% of their investment as a tax credit if construction begins by the end of 2019. It drops to 26% in 2020, then to 21% in 2021, and finally to 10% in 2022. Therefore, there's an incentive to squeeze projects in before the end of this year, but the law has very particular definitions of "starting construction." The most common way to satisfy the law is to prove that 5% of the total project cost has been incurred -- and the easiest way to do that is to purchase a bunch of inverters.
In the third quarter, Enphase Energy recorded $8 million in revenue specifically related to customers wanting to place their solar energy projects into safe harbor for 2019. That was within its prior guidance range of $6 million to $10 million. What Wall Street might be disappointed about is the expectation for the fourth quarter.
The company estimates it will record approximately $35 million in product sales aimed specifically at satisfying the safe-harbor requirement, but it expects "only" $200 million to $210 million in total revenue for the quarter. It seems Wall Street is concerned that revenue isn't growing all that much without the end-of-year ITC push from customers or that it'll drop off at the beginning of 2020.
While anything that unravels the growth story for a stock trading at a premium can weigh on shares, this concern would be a bit unfair to place on the company. The timing of the ITC phaseout is out of Enphase Energy's control. And since it affects the whole domestic industry, it's affected the timing of projects across the United States. Volatility is just an unfortunate side effect of renewable energy tax credits nearing their end.
In fact, wind energy is going through the same thing as developers race to claim an expiring production tax credit. While the country will add approximately 22,000 megawatts of wind power capacity in the 18 months ending December 2020, an estimated 6,000 megawatts will enter service this December and another 11,000 megawatts will come on line in the final four months of next year.
Put another way, if safe-harbor revenue or the end-of-year volatility from the ITC are the reasons Wall Street is worried, then investors can sleep soundly at night.
Investors can't lose sight of the long-term potential
The important thing is that Enphase Energy is focusing on the factors it can control. The company will begin shipping its IQ 7A inverter in November, which can handle high-capacity 450-watt solar panels entering service in the next three years. The business is also preparing to launch its Encharge energy storage systems, which include battery cells, inverters, and software solutions for one seamless experience.
Simply put, the business is well positioned to grow along with the solar industry -- and the best is yet to come, with or without the ITC.
