Shares of Enphase Energy (ENPH 3.80%) plunged 33.8% in October, according to data from S&P Global Market Intelligence.
This solar inverter leader had a very difficult month, as one of its main peers preannounced that it would miss third-quarter estimates by a wide margin. Days later, Enphase reported its own results, guiding for another down quarter even worse than its already low expectations.
A bust in residential solar
The residential solar market is in a correction, brought on by higher interest rates, changing regulations, and a give-back after booming demand in Europe after the Russian invasion of Ukraine.
During October, interest rates continued their months-long climb, with the 10-year Treasury bond yield almost reaching 5% in the middle of the month before backing off.
Higher rates make the upfront costs of a system much greater. And like the electric car market, it's unclear how big the market is after early adoption over the past decade.
On Oct. 19, Enphase took a leg down after its main rival, SolarEdge, preannounced its own third-quarter earnings that came in well below expectations. SolarEdge CEO Zvi Lando noted in the press release, "During the second part of the third quarter of 2023, we experienced substantial unexpected cancellations and pushouts of existing backlog from our European distributors."
A week later, Enphase surprised to the downside on what were already very low expectations. Revenue fell about 13% year over year to $551 million, missing expectations. However, it was really the forward guidance that shocked investors, with management projecting $300 million to $350 million in revenue for the fourth quarter.
Enphase had already noted that its American business had been weak, as higher rates hurt solar's competitive benefits in states with lower utility rates. In addition, California recently changed its net metering rules, making solar less attractive without also buying a battery storage system.
While Europe had been strong, demand also saw a severe pullback there. That is also due to similar phenomena -- interest rates and changing regulations. For instance, the Netherlands will likely change its net metering rules after this year's elections. In addition, many Europeans pulled forward demand in the wake of the 2022 Russian invasion of Ukraine. That demand seems to be receding now.
When will solar bottom? Will it come back?
After its huge pullback, Enphase investors may be wondering where things will bottom. It's hard to say.
Management noted that the current guidance implies the company would be under-shipping demand by about $150 million to correct inventory at distributors, and that this could continue through the second quarter of next year.
The big question is if residential solar will bounce back. It definitely might, especially if interest rates ebb, utility rates continue to rise, and incentives from the Inflation Reduction Act kick in for customers. But it's difficult to say, as new technologies and utility competition may also make other alternatives competitive.
However, Enphase has high-quality management team and technology, and is worth a spot on your watch list.
