In recent months, shares of solar equipment company Enphase Energy (ENPH 0.93%) have mounted a bit of a comeback after touching multi-year lows. The consumer solar power boom of the last few years has come to an end, but investors are betting that Enphase is gearing up for its next growth spurt sooner rather than later.
In its final quarterly update of 2023, management was quick to comment on its resumption of growth later in 2024. But is the stock really a surefire bet right now?
NASDAQ: ENPH
Key Data Points
Financials poised for another leg down
Much like other parts of the consumer-facing electronics market in the last couple of years, solar power equipment is in a slump. It all started in late 2022 with a post-pandemic downturn in sales of smartphones and PCs. Late in 2023, that weakness spread to bigger, more industrial purchases (cars, including electric vehicles, and solar power systems for homes).
Higher interest rates have made financing big purchases much harder for most people, effectively slowing growth for the solar industry. The end result was excess inventory of electronic parts, including Enphase's microinverters -- electrical hardware that converts electricity generated from a solar panel into usable power for the home.
The battle for Enphase and other companies that participate in the solar market is to help manage down the excess inventory on the market right now. Part of that involves closing down some of the new microinverter manufacturing capacity the company brought online during the boom times the last few years. Enphase CEO Badri Kothandaraman said on the last earnings call:
We expect that our shipments from U.S. facilities will be lower in the first half of the year as we reduce both factory as well as channel inventory. We anticipate a higher level of shipments in the second half of the year. For IQ batteries, we have two cell pack suppliers, both in China which have sufficient manufacturing capacity to support our ramp in 2024. In addition, we will have the capability to manufacture IQ batteries in the U.S. in the third quarter of 2024.
A key bit of Kothandaraman's commentary, though, was this expectation for a rebound in microinverter shipments in the second half of 2024. That has investors feeling fine about the current situation. Nevertheless, things are expected to deteriorate further in the first quarter of 2024 before they start to get better.
|
Financial Metric |
Q4 2023 |
Implied Q1 2024 Guidance |
|---|---|---|
|
Revenue |
$303 million (down 58% YoY) |
$260 million to $300 million (down ~61% YoY) |
|
GAAP gross margin |
48.5% (42.5% a year ago) |
42% to 45% (45% a year ago) |
|
GAAP operating income (loss) |
($10.2 million) (operating income of $157 million a year ago) |
($23 million) to $1 million (operating income of $168 million a year ago) |
Data source: Enphase Energy. GAAP = generally accepted accounting principles.
Is Enphase stock really a good deal right now?
At this point, management thinks the first few months of 2024 will be the bottom of Enphase's downturn. If this turns out to be accurate, the recent stock rally could be justified. However, what remains to be seen is just how much of a recovery in sales can be made.
After all, one of Enphase's biggest markets, California, is transitioning to a new net metering plan (NEM 2.0 to NEM 3.0) that has sent the value of consumer energy sales back to the energy grid far lower than in the past. That has caused a big halt in new solar array sales in the state.
Enphase is still positive on California in the long term, and thinks new markets -- especially internationally, where Enphase has little presence (revenue was 75% in the U.S. at the end of 2023) -- can propel business higher.
But does that make the stock a buy? Consensus Wall Street estimates remain pretty decent for Enphase's ability to quickly turn the corner on profitability again, with projections pointing to $1.70 in GAAP earnings per share for 2024, and free cash flow (FCF) of $465 million (an FCF profit margin of nearly 30% based on revenue estimates of about $1.6 billion). That seems a bit optimistic to me. But even if that projection pans out, Enphase currently trades for nearly 40 times consensus free cash flow for 2024 (based on a market cap of $17.8 billion as of the morning of Feb. 15, 2024).
For me, it's still too soon to buy Enphase stock. I will be sitting on my hands for the time being, but the company still has my interest.
