There's no denying Enphase Energy (ENPH 2.17%) dished out some disappointing numbers last week.
Although first-quarter sales were up a healthy 64% year over year, the quarter currently underway won't be nearly as impressive. The solar energy technology company is calling for sales of between $700 million and $750 million -- versus a consensus estimate of $745 million. So at the midpoint of that range, Enphase's second quarter top line would improve by about 37%.
Oh, sure -- that's still enormous growth for most companies. This particular company's stock, however, has been historically valued at a premium based on much bigger growth rates. Investors aren't quite sure how to price shares now that its comparisons are getting tougher. They just fear the future enough to sell shares in earnest now.
In the bigger picture, though, the solar power evolution is still going strong, and the world is going to need plenty of Enphase's microinverters to turn the Sun's rays into usable electricity -- all of which makes the stock's recent pullback a buying opportunity.
Fallout from net energy metering rules change
There are two key factors behind the company's lackluster second-quarter outlook. One of them is changes to California's net energy metering, or NEM, rules.
Net energy metering is the reversal of electricity flow from a utility company to a utility customer. Rather than consuming it, new technologies like those made by Enphase allow utility customers to sell stored or produced electricity back to the producer. It's catching on in lots of places, but particularly in California, where power production capacity is often unable to keep up with demand.
Californian's newest NEM rules (commonly called NEM 3.0) went into effect in the middle of last month, replacing NEM 2.0 rules that installers not only better understood, but seemed to prefer. And the impact is clear. As was explained during the company's Q1 earnings call, a rush to install new solar panels and their microinverters under the older rules translated into fewer sales of Enphase's bigger-ticket, electricity-storing batteries. CEO Badrinarayanan Kothandaraman says he "expect this trend to continue for the next three to four months."
There's the crux of the current quarter's likely lull. And yet, it's apt to be a short-lived one. Once the soft patch has run its course -- say, in four months -- Kothandaraman sees NEM 3.0 as a net positive and expects "strong demand to resume for solar plus storage." He also notes many solar power system installers are now backlogged with three to four months' worth of work, which bodes well for revenue growth again beginning in the second half of this year.
Equipment production is being relocated
It's not easy to see, but the solar panel and solar power technology business is in flux. The industry has long been dependent on cheap panels from China and its neighbors. With last year's Inflation Reduction Act and Defense Production Act both encouraging more domestic production of solar technologies, however, manufacturing is slowly shifting away from the Pacific Rim. Import tariffs are a contributing factor too.
It's a somewhat disruptive -- even if only temporary -- dynamic though. Some installers are currently struggling to source all the panels they need. Since solar panels and inverters are installed together (in that both are needed to make solar power), these installers don't currently need Enphase's microinverters in the same quantities they used to earlier.
At the same time, Enphase is facing its own delays in production of its own tech. While Kothandaraman says "there are no major shortages right now," its Romanian microinverter production line only went active during the first quarter. Three other partnered-production projects are expected to go live between now and the end of this year's third quarter.
In other words, Enphase isn't operating at maximum production capacity right now. It soon will be though, and it will be doing so in a pro-solar environment that's firmly bullish for the company.
Just hold your nose and dive into Enphase
That bullish environment is simply raw demand for all types of solar power technologies. Europe's pro-solar association of the industry's key players, called SolarPower Europe, estimates worldwide solar power production capacity will double by 2025. In the meantime, the Solar Energy Industries Association believes the U.S. solar market's output capacity will triple between now and 2027.
And that's an important outlook. The U.S. is Enphase's proverbial problem child right now. Domestic revenue sequentially slipped 9% year over year last quarter due to a combination of weather and demand issues.
To this end, while next year's projected sales growth of 25% is slower than this year's anticipated improvement, Enphase's scale is finally big enough to begin widening its profit margin in earnest. Next year's projected per-share earnings of $7.35 is more than 30% better than this year's likely profits of $5.57, and a hefty 59% higher than last year's bottom line of $4.62. More of the same kind of growth is in store beyond that point.
Data source: Thomson Reuters. Chart by author.
The stock's current price is also a modest 21 times next year's expected profits. These are the bigger-picture numbers you really want to worry about here. And in this case, the numbers are plenty compelling.
Bottom line? There's more risk being priced into the stock now than is merited. The market's simply overreacting to a headline, ignoring how quickly this company could (and very likely will) shake off its current troubles and rekindle its growth journey.
