Enphase Energy (ENPH -1.40%) has had a rough few weeks, capped off by an earnings report last week that left a lot to be desired. Not only were third-quarter results relatively weak, but management now expects a huge drop in earnings for the fourth quarter of 2023 and the first quarter of 2024.
A recovery could be on the horizon for the maker of solar power and energy storage systems, but it isn't likely to take shape until mid-2024 at the earliest. And once it does, it's not clear whether Enphase will maintain the market share and margins investors have grown accustomed to. So is this a low for the market, or is the stock going to continue to drop?
Enphase's fall from favor
Before getting into the operating trends, I want to put Enphase's current $10.8 billion market cap into context. We don't want to compare it to what this company's valuation was previously but rather to other leading companies in the industry like SolarEdge (SEDG 6.33%), Sunrun (RUN -0.17%), and SunPower (SPWR). You can see that Enphase is worth more than all of them combined.
This isn't necessarily wrong. Enphase has a less capital-intensive business than installers and sits in a very high-margin part of the value chain. But I don't want to lose sight of the fact that this is not a cheap company compared to many of its competitors and partners.
The warning for investors
The third-quarter results and fourth-quarter forecast brought to light how much growth might slow for Enphase and why the company might experience margin compression in the future.
On the growth side, Enphase has benefited from growing into the market over the past five years. But now, Enphase is at the whims of the market, especially in California, which reduced the benefit of selling solar power back to the grid. Higher interest rates also have hurt because many buyers finance purchases of its systems.
This is why the company expects revenue to drop from $634.7 million in the third quarter to between $300 million and $350 million in the fourth quarter.
The margin problem
In 2020, Enphase's gross margin, based on generally accepted accounting principles (GAAP) was 44.7%. In Q4 2023, management expects GAAP gross margin to be 38% to 41%. It certainly appears that wide margins are coming down, and that's for a good reason.
The core microinverter (devices that covert DC power to AC) business will see pressure from competition. No solar company has been able to maintain 40% margins for long, and I would expect Enphase to face the same challenge now that it's reached scale.
Another challenge is moving into batteries, where Enphase is finding growth at the expense of margins. Competition is intense in the segment and, because there's little difference between one battery and another, they are priced like commodity products.
If revenue growth has stalled and margins are under pressure, investors certainly don't want to pay a premium for a stock like Enphase. So have we entered value territory yet?
Is Enphase Energy stock a buy?
Looking backward and assuming Enphase's stock price, revenue, or margins will return to previous levels isn't advisable right now. With a company like Enphase, I think investors need to see intrinsic value, and we're simply not there yet. Even the forward earnings multiple seems optimistic given the fact that the company might report net losses in Q4 2023 and Q1 2024.
A recovery might indeed be on the way for Enphase, but I want to see its take hold, not bet that we're at the bottom. And that's why this stock isn't a buy...yet.