Shares of Enphase Energy (NASDAQ:ENPH) fell as much as 26.2% today after the company reported third-quarter 2019 operating results. The solar hardware developer turned in a solid performance, growing revenue 131% from the year-ago period to $180 million and expanding operating margin to an all-time high of 18.7%. It beat Wall Street expectations on both revenue and adjusted earnings per share (EPS). And it expects to achieve $200 million in quarterly revenue for the first time ever in the fourth quarter.
So, why are shares crashing today? Believe it or not, Wall Street is worried that growth may be slowing. Believe it or not, that may be the case, but only if investors adopt a short-term mindset. It primarily comes down to two factors: Europe and safe-harbor revenue from the solar investment tax credit (ITC).
As of 10:31 a.m. EDT, the stock had settled to a 23.9% loss.
Though the third quarter marked the first time Enphase Energy caught up to demand in several quarters thanks to new production capacity in Mexico and other supply deals, demand is still growing at a healthy clip. The business grew the dollar amount of its inventory 69% year over year, but ended September with just 24 days of inventory, compared to 31 days at the same time last year.
Wall Street is still concerned that growth might be slowing. First, there's Europe. Enphase Energy CEO Badri Kothandaraman expressed his disappointment with execution on the continent and pledged to do better. Third-quarter 2019 revenue in Europe slipped 21% sequentially and grew 47% year over year.
Second, analysts are concerned about the impact on the business from the ITC. Solar energy project developers and homeowners can claim 30% of the project cost as a tax credit if they incur at least 5% of the total project cost before the end of 2019. After that, the tax credit begins to get phased out: Developers can claim 26% in 2020, 21% in 2021, and only 10% in 2022.
One of the easiest ways to meet that 5% threshold and place an under-construction solar project in safe harbor for the 30% tax allowance is to purchase inverters. As a result, Enphase Energy recorded $8 million in safe-harbor revenue in the third quarter and expects to record $35 million in the fourth quarter. But if investors subtract that from total revenue, then third-quarter revenue (achieved) slips to $172 million and fourth-quarter revenue (expected) slips to no less than $165 million.
That suggests the rest of the business is in a lull, or that planning around the ITC is artificially altering solar project development and will create end-of-year volatility for the next several years. Welcome to the world of renewable energy tax credits.
Considering Enphase Energy has been one of the best growth stocks all year, it's not too surprising that shares are getting whacked as concerns over growth crop up. The solar stock had been trading at a healthy premium in recent months based solely on its growth potential. That said, the business is comfortably profitable and has several growth opportunities on the horizon, including the launch of the next-generation IQ 8 microinverter and its revamped energy storage portfolio. It's also worth remembering that solar energy is only barely scratching the surface of its global growth potential. Therefore, investors with a long-term mindset shouldn't be too discouraged by the latest quarterly results or Wall Street's concerns.