After Enphase Energy (ENPH 3.80%) soared to extreme highs in late 2022, it has been all downhill for the solar power stock in 2023. The company is hitting some speed bumps in its most important markets, and it appears its years of stellar growth are coming to an end. As a result, shares are down over 50% so far this year.
There's still plenty of reason for optimism about Enphase's future, though, as the world gradually pivots toward greater use of renewable energy. The company's immediate-term outlook is poor, but by certain metrics, Enphase stock could be a real bargain. Is it time to go shopping?
Enphase's big problem now
Enphase got its start making inverters for residential solar panels. These devices convert the DC (direct current) electricity those panels generate into the AC (alternating current) electricity that we use to power our households. The company has steadily expanded its product lineup to include battery storage systems, home charging systems for electric vehicles (EVs), and software that manages the whole home solar power system -- including software that automates the sale of solar-generated power back to your local utility company.
Enphase has been a fast-growing business for years, and the passage of the Inflation Reduction Act in the U.S. helped supercharge interest in solar power, and especially in stocks like this one.
So what's the problem? Most households in the U.S. that equip their homes with a solar power system use some sort of financing plan to pay for it. U.S. interest rates have soared over the last year and a half, which has throttled domestic sales of those systems, and thus reduced demand for Enphase's inverters, batteries, and the like. Management said the effect was most pronounced in Texas, Florida, and Arizona due to a combination of higher interest rates and lower rates being paid by their utilities for the electricity solar owners sell back to the grid.
In California, Enphase's largest market, growth continued as the NEM 2.0 (Net Energy Metering) program came to an end -- a program that aimed to make it easier for households to install solar panels and sell their excess energy back to their local utility. NEM 3.0 (which reinstates some previous restrictions on how customers sell solar-generated electricity back to their utilities) took effect in April, but there's a lag in new projects that should kick into gear for Enphase late this year. Enphase has a new system designed with NEM 3.0 in mind that will help customers fully recoup the price of their systems within five to seven years (assuming they pay cash instead of financing).
All of this is being slightly offset by growth in new markets in Europe, Australia, and Latin America. Nevertheless, the end result of a decline in the U.S. for Enphase is that its distributors must now work through excess inventory of inverters and other system components -- a situation reminiscent of what's been going on with smartphone and PC semiconductors.
Enphase is expecting revenue in the $550 million to $600 million range in the third quarter, down from $635 million in the prior-year period. Profit margins are forecast to head in reverse as well, with gross profit margin expected to dip to as low as 41%, down from 45% in the first half of 2023.
Data by YCharts.
Enphase shares are cheap -- or are they?
All of this is expected to deal a temporary setback to Enphase even as the clean energy provisions of the Inflation Reduction Act continue to encourage more U.S. households to adopt solar. And its international expansion is still in the early innings, too. Despite a sizable downturn coming in the back half of this year, Wall Street analysts are still expecting an overall up year for Enphase's earnings per share (EPS) and free cash flow (FCF). This is largely thanks to the company expanding its manufacturing base and getting more efficient.
As of this writing, the stock trades for 35 times expected 2023 EPS, 24 times expected EPS on an adjusted earnings basis, and just 21 times expected FCF.
For a growth stock, those could be cheap valuations. But that conclusion depends on whether you believe Enphase is still a growth stock. For the record, Wall Street analysts seem to think Enphase will bounce back in a big way in 2024. The consensus forecast is for 21% revenue growth over 2023 and a return to expanding profit margins. With new product launches in battery storage, EV chargers, and small commercial solar systems, plus the expansion into new markets that's already underway, I'm also of the opinion that Enphase's weakness will be temporary.
I took a first nibble on this stock earlier this summer, and might nibble again before the end of 2023. However, it will be a small nibble. The stock price could remain under pressure for as long as Enphase continues forecasting short-term weakness in its financial results. In other words, more buying opportunities could lie ahead.
In the meantime, there are other ways to invest in the transition to renewable energy. Onsemi is a top power semiconductor business that supplies most of the top solar inverter makers. And lithium is another market worth considering, given that the metal is a key ingredient in storage batteries. Albemarle and Livent are my two picks in that sector. Together with Enphase, these three stocks will form the basis of my renewable energy holdings over the next decade.
