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The Case Against Enphase Energy's $200 Million Share Repurchase Program

By Maxx Chatsko – May 21, 2020 at 9:40AM

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Shares are at an all-time high and trading at a historic premium. A stock-buyback program could be a terrible use of cash for the high-growth business.

When it comes to high-growth opportunities, few companies have delivered for shareholders quite like Enphase Energy (ENPH -9.24%) in recent years. The business grew annual revenue from $286 million in 2017 to $624 million in 2019. In that short span, gross profit jumped 294% and an operating loss of $39 million swung to an operating profit of $102 million.

Profitable growth of that magnitude is pretty rare, which helps to explain why investors have placed a steep premium on shares. Enphase Energy is valued at $8.4 billion and 12.4 times trailing sales. The growth stock has gained 9,540% in the last three years.

That's all worked out pretty well for investors, but a new initiative might not have such a favorable outcome: a recently announced $200 million share repurchase program.

A businessman tossing cash into the air.

Image source: Getty Images.

Why buying back stock is a terrible use of cash

Enphase Energy sells some of the market's leading solar microinverter products, which make the energy created by solar panels usable by modern grid infrastructure. The current-generation product is tiny, efficient, and meets strict electrical codes, which has helped it to become one of the microinverters of choice for solar projects large and small all over the globe. The next-generation product under development is even more powerful. 

A combination of great technology and astounding growth for solar energy have helped Enphase Energy achieve profitable growth virtually overnight. First-quarter 2020 operating results were just the latest leg in the company's revival:

Metric

Q1 2020

Q1 2019

Change

Revenue

$205.5 million

$100.1 million

105%

Gross profit

$80.6 million

$33.3 million

142%

Gross margin

39.2%

33.3%

590 basis points

Operating income

$44.7 million

$7.1 million

526%

Operating margin

21.7%

7.1%

1,460 basis points

Data source: SEC filing.

The encouraging first-quarter 2020 operating performance was offset by second-quarter 2020 guidance expecting a severe slowdown caused by the coronavirus pandemic. Enphase Energy expects quarterly revenue of $115 million to $130 million -- a steep departure from the recent growth trajectory.

Despite weak guidance for near-term operations, the stock rallied through mid-May as investors interpreted economic tea leaves to suggest there will be a quick recovery from the upcoming recession. It certainly helped to know that Enphase Energy's board of directors approved a $200 million share repurchase program to help offset dilution from employee incentive plans. In other words, the company is willing to provide a backstop of sorts to support a strong stock price.

As explained on the first-quarter 2020 earnings conference call, the share repurchase program is in place through March 2022. Enphase Energy can purchase stock in the open market or through agreements with third parties. As CFO Eric Branderiz put it, the initiative "adds another tool for our toolkit to increase shareholder value when management believes the market value of the stock deviates materially below the conservatively calculated intrinsic value."

Considering Enphase Energy ended March with $549 million in cash, the company certainly has enough flexibility to complete the program. And even though shares are at an all-time high now, management can use the tool at any point in the next two years -- perhaps after a large correction of the stock price. So what's the big deal?

There are a few reasons investors with a long-term mindset might trade a little dilution from employee incentive plans for a loaded balance sheet:

  • A steep premium: Shares of Enphase Energy trade at 12.4 times trailing sales and 62 times future earnings. In 2019, the stock traded at an average of roughly four times trailing revenue and 20 times future earnings. Given the current market uncertainty, would a share buyback program be a good value even if shares tumble by half? 
  • Concentrated risk: In 2019, Enphase Energy leaned on two customers for 33% of total revenue. If one experiences a catastrophic slowdown due to the coronavirus pandemic or upcoming recession, then it would create a significant headwind for the microinverter provider.
  • Risky new markets: Enphase Energy has been preparing to launch Encharge battery storage systems and enter home energy-storage markets. The products have been delayed multiple times (now expected to ship in June 2020) and the consumer energy-storage market has been challenging to crack. An extra $200 million in cash could help mitigate those risks.
  • Constant improvements required: Enphase Energy has delivered on the promises of its technology platform in recent years, but the microinverter and energy-storage markets are highly competitive. The business must continuously improve its offerings to maintain market share, either through in-house research or acquisitions. Wouldn't an acquisition be a better use of cash from the perspective of investors?

Enphase Energy should keep the cash

Many companies have leaned on sharebuyback programs to support stock prices in recent years, but many economists have worried that it's not the best use of cash. It can be difficult to get the timing right and, to be blunt, a company could generate more value by investing in growth, research and development, or employees.

When it comes to Enphase Energy, there are multiple signs suggesting the company shouldn't be too quick to buy back shares. The growth stock trades at a hefty premium, the business is dependent on two customers for one third of its revenue, and the company's upcoming energy storage offering is far from guaranteed to find success -- it's stumbled twice before it's even had a chance to launch. Simply put, shareholders would much rather have an extra $200 million on the balance sheet than have management offset dilution from employee-incentive programs. 

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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