Enphase Energy (ENPH 3.80%) was one of the worst-performing stocks in the S&P 500 last year. Before Wednesday's pop, the start to 2024 was also bad, as Enphase lost 24% of its value from year-end 2023 to Feb. 6.
Enphase is still down for the year, even after surging 16.9% on Wednesday, February 7th. But there are signs the company is heading in the right direction. Here's a brief breakdown of what you need to know from Enphase's recent quarter, some of the hidden gems from the earnings call, and where the growth stock could be headed from here.
Image source: Getty Images.
Barely hitting the mark
In its third-quarter earnings release, Enphase guided for fourth-quarter revenue of $300 million to $350 million, a gross margin of 42% to 45% under generally accepted accounting principles (GAAP), and GAAP operating expenses of $144 million to $148 million. Enphase barely hit the low end of the revenue goal, posting sales of $302.6 million.
Actual Q4 gross margin was 48.5%, above the high end of the range. But GAAP operating expenses were $156.9 million -- above the guidance. Enphase has a lot of stock-based compensation, which makes its non-GAAP operating expenses far lower than its GAAP operating expenses. It's better to use GAAP with Enphase until it ceases to be so reliant on stock-based compensation.
ENPH Revenue (Quarterly) data by YCharts
This chart sums up what's going right with Enphase (margins) and what's going wrong (sales have crashed, and Enphase is nearly unprofitable).
Overall, the quarter was just OK. But certainly, there is no reason to get excited about the stock. Rather, the optimism comes from what Enphase management said on the earnings call.
The worst could be over
Back in October on its Q3 earnings call, Enphase said that the second half of 2024 could show signs of improvement to Q4. Enphase CEO Badri Kothandaraman verified that optimism on the recent earnings call:
We think Q1 could be the bottom quarter. Europe is already showing early signs of recovery, and we expect the non-California states to bounce back quickly. California is the exception as NEM 3.0 is having some hiccups in the near term. However, we remain very bullish about NEM 3.0 in the long term.
According to Enphase, "net energy metering (NEM) 3.0 is California's newest net metering policy, used to dictate the prices that utilities pay for the solar energy produced by homes and businesses."
Back on the Q3 earnings call, Enphase said that channel inventory problems and native demand problems were creating about a $150 million revenue headwind on what its true sales should be. It reiterated that issue in the Q4 earnings call, saying that Q4 2023 customer demand was $450 million and that Enphase "under-shipped" $147 million, which is why it reported $303 million in revenue. In other words, demand is better than it seems. Enphase expects to begin to alleviate these problems and for its sell-in numbers to improve in the second quarter. All told, the overall market is getting better and Enphase's problems seem to have an end in sight.
Enphase deserves a lot of credit for retaining high margins during this downturn. Instead of relying on steep discounts to boost sales, Enphase's management team prioritizes margins at the expense of its short-term revenue. Enphase has made its strategy abundantly clear for a while now. But still, to have gross margin stay the same, let alone improve, in the current business climate is a big accomplishment for the company.
A page out of Target's book
Target may be a completely different business than Enphase. But its report from last November is eerily reminiscent of what Enphase just announced.
Let's take a trip back to Halloween 2023. Target was down over 57% in two years and was hovering around a three-year low. Its margins were declining, sales growth was OK, but some of it was just due to inflation. And management warned of further pressures from weak consumer spending.
Target's Q3 2023 earnings report on Nov. 15 wasn't remarkable, but it did show several signs that the worst was over. Margins were improving, inventory was down, Target was prepared for a weak holiday season, and the loyalty program and curbside pickup program were doing well. It was far from a blowout quarter, but it was a momentum shift. You could feel it on the earnings call, and it showed in the stock price, which posted its largest one-day gain in four years. Target kept rallying from there. Between Halloween last year and Feb. 7, Target surged over 32% -- a massive move for what is normally a stodgy and reliable dividend-paying stock.
Enphase's near-17% pop in a single day is similar to Target's and showcases that the market cares more about what a company is going to do than what it has already done.
An investment thesis centers around a story. Enphase's long-term story is that it will benefit from increased solar adoption and can sustain high margins due to its integrated solar offering, which includes storage, electric vehicle charging, and more (aside from just the inverter).
That story is damaged by slowing growth. But it isn't broken. The sooner Enphase's sales can bottom, and the company returns to growth, the more the market will likely be reminded of Enphase's investment thesis.
Patience is paramount
Enphase may be turning the corner, but it isn't out of the woods yet. The solar industry is extremely sensitive to interest rates, which show signs of going lower but could remain elevated longer than expected. It will likely take at least another year before Enphase returns to the growth that investors became accustomed to in 2021 and 2022. If you're going to invest in Enphase, you have to accept a lot of volatility and recognize how sensitive the stock price can be to quarterly figures and broader market conditions.
There will be pressure on Enphase's next quarterly results to show that Q1 was, in fact, the bottom. Some investors may prefer to take a wait-and-see approach, while others may be willing to accept the risk and buy Enphase now. The choice ultimately depends on your confidence in Enphase's ability to deliver and your tolerance to withstand a steep sell-off in the stock if Enphase disappoints.
