What happened
The first week of 2022 was a cloudy one for solar and energy storage outfit Enphase Energy (ENPH -2.46%). Shares fell nearly 21%, according to data provided by S&P Global Market Intelligence. The drop builds on the sharp sell-off the stock suffered during the last month and a half of 2021. Enphase is now 44% down from its all-time high reached just a couple months ago.
Image source: Getty Images.
So what
The threat of higher interest rates is the blame for this week's most recent drubbing. Specifically, minutes released from the Federal Reserve's last meeting in December 2021 indicate an interest rate hike is coming sooner than later. The committee is mulling measures to try and tamp down inflation, but that has high-growth but richly valued stocks in retreat.
The energy sector -- the best-performing sector in the stock market last year with a 48% return -- is holding up well this week. But Enphase is no cheaply valued, dividend-paying fossil fuel company. Even after the recent crash, shares trade for a respective 17 and 72 times trailing 12-month sales and trailing 12-month free cash flow, a steep premium even for a fast-growing company such as this. As a reminder, higher interest rates lower the value of future cash flows, which in turn lower the present value of a stock.
Now what
Additionally, higher interest rates might put some pressure on solar and other renewable energy projects. Developing new energy systems is capital intensive and often funded with debt. Higher rates thus make it more expensive to break ground on a new project.
Nevertheless, Enphase's software-defined solar and storage systems and components are enjoying growing demand, and revenue is expanding at a fast pace. With renewable energy projects getting plenty of attention these days, a small interest rate hike probably isn't enough to derail upgrades. But with shares far from a value, expect plenty more volatility at least this year if the Fed sticks to its guns and starts to unwind its pandemic-era emergency policies.
