Shares of solar microinverter company Enphase Energy (ENPH 3.80%) rallied 30.8% in December, according to data from S&P Global Market Intelligence.
The stunning rally nicely dovetailed on Enphase's 27% rally in November, making for quite an impressive fourth quarter, indeed.
December's inflation readings showed inflation continuing to come down, leading to a rally in interest rate-sensitive stocks. In addition, there were also a couple of company-specific news items that helped propel Enphase to another outstanding month.
A tax break and restructuring initiative boosts enthusiasm
Early in the month, the U.S. Treasury proposed rules regarding the implementation of tax credits for domestic clean energy manufacturers as outlined in 2021's Inflation Reduction Act. According to analysts at Citibank, the new rules were more favorable than expected for domestic solar inverter manufacturers like Enphase. According to the analyst, the new rules allow for Enphase and its competitors to manufacture components in the U.S. and then export the inverter, while still getting the full tax credit.
That's a big positive, as Enphase got a significant 36% (and growing) proportion of revenue from international sales last quarter. And the greater volume allowance will increase factory utilization and boost margins for its U.S.-based manufacturing plants.
The second bit of good December news, at least for investors, was that Enphase announced a restructuring plan. The plan will reduce its workforce by about 350 positions, or 10% of its workforce. The company also said it would stop contract manufacturing at two of its production locations in Wisconsin and Romania, and redeploy that equipment to two other existing locations in South Carolina and Texas.
As a result of the plan, which will entail $16 million to $18 million in severance expenses, Enphase believes it can cut its operating expenses to between $75 million to $80 million per quarter going forward. That's a big deal, as Enphase had over $118 million in operating expenses last quarter.
That $160 million or so in annualized savings will be needed, as the solar energy market is currently in the midst or a rather nasty cyclical downturn. Enphase projects next quarter's revenue to fall to between $300 million and $350 million, a severe decline from the $551 million last quarter and $711 million in the second quarter.
Where does Enphase go from here?
Enphase has now rocketed 70% higher off its 52-week lows, but it still sits 63% below its all-time highs from late 2022.
At the current price, it's very difficult to judge Enphase's next move. The market has assumed the relief from a lower long-term interest rate will spur the residential solar market to a recovery, but it's really a bit premature to say that for certain.
After all, the 10-year Treasury bond, off of which many long-term home loans are priced, declined from near 5% in October to just 3.79% in late December. But it has already crept back up over 4% to start the new year.
It's also unclear how the evolving regulatory landscape for home solar, especially around net metering rules, will evolve in places like California and Europe.
While residential solar should have a long-term runway and Enphase is known as a premium technology leader, its valuation also sits at 29 times earnings, with those earnings certain to decline in the near term. Therefore, while Enphase may have promising long-term prospects, I wouldn't be surprised to see the stock revisit this past year's low.
