Enphase Energy (ENPH 3.80%) stock is sinking in Friday's trading. The solar energy and battery tech company's share price was down 15.2% as of 10:45 a.m. ET, according to data from S&P Global Market Intelligence.
Enphase published its third-quarter results after the market close yesterday, announcing earnings that beat the market's expectations, but sales that fell short of Wall Street's target. While the Q3 sales miss was concerning, investors are likely even more worried about the company's forward guidance.
Enphase's earnings report is flashing warning signs
Enphase reported non-GAAP (adjusted) earnings per share of $1.02 in the third quarter, beating the average analyst estimate's call for per-share earnings of $1 in the period. On the other hand, sales came in at $551.08 million and missed the average analyst estimate's revenue target by $15.72 million. Revenue was down roughly 13% year over year in the quarter.
The Q3 results certainly weren't great, but it's the forward guidance that's really worrying here. Enphase guided for fourth-quarter sales to come in between $300 million and $350 million. For comparison, the business recorded sales of $724.7 million in last year's quarter.
Additionally, the company is guiding for a generally accepted accounting principles (GAAP) gross margin between 38% and 41% and an adjusted gross margin between 40% and 43% before factoring in benefits from the Inflation Reduction Act (IRA). Last year, the business posted a gross margin of 42.9% and an adjusted gross margin of 43.8%.
After factoring in net IRA benefits, the GAAP gross margin is projected to come in between 46% and 49%, and the adjusted gross margin is expected to be between 48% and 51%. So while the gross margin will improve significantly on paper thanks to IRA benefits, it would actually be declining significantly otherwise.
What happens next for Enphase Energy stock?
Enphase Energy stock has struggled in 2023 and is now down roughly 63% year to date. Even so, the company's valuation still leaves room for significant downside potential.
ENPH PE Ratio (Forward) data by YCharts
Trading at roughly 4.3 times this year's expected sales and 16.6 times expected earnings, some degree of business recovery is already priced into the stock. Notably, the company is facing weak demand right now due to high levels of existing customer inventory.
Management expects that its quarterly sales level will rebound to somewhere between $450 million and $500 million in next year's second quarter and beyond. But it's hard to put too much confidence in the projection given that Q4 guidance came in so far below expectations. If sales see significant recovery next year, it's reasonable to expect that the stock can bounce back significantly above current levels. Investors just need to understand that's not a sure thing.
