When it comes to the clean-energy sector, it seems that electric vehicles (EVs) get most of the attention. Even for Tesla, Wall Street and retail investors alike place heavy scrutiny on the company's vehicle production, but the curiosity around its energy storage business pales in comparison.
Investors should be aware that clean tech encompasses far more than EVs. Solar energy and batteries constitute a large and growing component of the industry. Enphase Energy (ENPH 3.80%) creates batteries and microinverters for homeowners and businesses, and in the current macroeconomic climate, the company has been no stranger to operational hurdles.
Its financial profile is far from linear. However, a deep dive into its second quarter results may show that Enphase is actually well positioned and, more importantly, has a lot of potential. Let's dig in and assess if the stock is worth a spot in your portfolio.
What challenges does the company face?
One of the biggest threats to Enphase is the competitive landscape, with Tesla, SolarEdge Technologies, and others marketing toward the same customer base. Given this level of competition, there is only so much business to be had.
One of the most effective ways to entice consumers is by undercutting the competition on price. This is a classic example of how products eventually become commoditized in the eyes of the buyer.
Besides pricing, another challenge Enphase could be dealing with is the state of the U.S. housing market. The combination of higher borrowing costs and rising real estate prices has made home affordability a genuine concern in the U.S., which leads me to my last point.
Installing solar energy in your home is not cheap. For this reason, many buyers choose to finance these projects in the form of a loan or lease. However, the U.S. is currently experiencing high interest rates as the Federal Reserve continues to combat inflation.
On one side of the equation, Enphase is seeing its competition try to appeal to buyers with lower pricing. This strategy could influence the company's own pricing model which, theoretically, would impact operating margins.
On the other side, Enphase's business could be witnessing a plateau due to the housing market. And given that solar energy is more of a luxury purchase at the moment, taking out a high-interest loan to fund it is likely not feasible for the average homeowner right now.
Image source: Getty Images.
How have these challenges affected performance?
For the second quarter, ended June 30, Enphase reported $711 million in revenue, which was 34% growth year over year but a sequential decline of 2% compared to the first quarter. And the company's revenue from its U.S. business declined for the second consecutive quarter.
On the bright side, Enphase has witnessed some impressive growth overseas. Since the year-ago second quarter, the company has almost tripled international revenue from $108 million to $294 million.
While the slowdown in U.S. business could be a real concern, Enphase has done a nice job with capital preservation. Through the first six months of the year, the company reported net income of $304 million under generally accepted accounting principles (GAAP), for 136% growth year over year.
Should you buy the stock?
Given Enphase's level of profitability, it should not surprise investors that the company has built a deep liquidity position. It ended June with nearly $1.8 billion in cash and equivalents. Moreover, assuming its free cash flow continues to rise as suggested by the chart below, it should be able to reinvest in the business or return capital to shareholders.
ENPH free cash flow (quarterly) data by YCharts.
At the time of this writing, Enphase stock is trading more than 60% off its yearly high. Given the dynamics consumers face domestically, coupled with rising competition and third-quarter guidance that calls for more revenue shrinkage, the sell-off might appear warranted.
There is little doubt that buying Enphase stock at these levels carries risk. It could absolutely drop further if the third quarter disappoints. My strategy would be twofold: If you currently hold the stock, now could be an opportunity to lower your cost basis instead of waiting for any further sell-offs. If you do not own it, then opening a small position only if you believe the challenges in the U.S. will begin to turn around sooner rather than later might make sense.
Interest rates will not go up linearly forever, and homebuying activity should eventually normalize. However, if your stance on the economy is less bullish, Enphase might be beyond your risk profile.
