While Enphase Energy, Inc. (NASDAQ:ENPH) hinted at the solar sector market hitting bottom in the next quarter or so, the stock has already surged off the bottom. Solar demand may never return to the growth levels of the last couple of years when Europeans were under pressure to find new energy sources due to the loss of energy supplies from Russia. My investment thesis remains Bearish on the stock after the big rally.
Brutal End To 2023
Investors need to understand Enphase Energy actually reported a brutal end to 2023. The solar company missed consensus estimates by a wide margin as follows:
The stock bounced over 30% now on the news of solar demand potentially reaching a bottom in the next quarter or so. Anytime a stock trades opposite the actual reported numbers, it’s definitely an indication of a reversal in the market’s view on the stock. The issue here is that the actual story on the stock has to change for the rally to last.
Enphase missed consensus revenue targets for Q4 ’23 by a very wide margin of $25 million considering the reported revenues were only $303 million. Following Q3 ’23 results, management had guided to revenues between $300 to $350 million, so technically the company reported within their internal forecasts.
The main issue here is that management guided to Q1 ’24 revenues of $260 to $300 million, far below consensus estimates of $316 million. The market likely keyed too much on the following statement by the CEO on the Q4 ’23 earnings call:
One is channel being full problem, channel inventory problem and the other is the native demand problem. And so with the demand reduction of about, let’s say, 30% to 35% from our overall highs, what we expect is an end customer demand roughly in the range of $450 million to $500 million. That’s what I told you the last time. And we were close, our Q3 end customer demand, Q3 ’23 end customer demand was approximately $500 million. Our Q4 ’23 end customer demand was approximately $450 million.
A difference exists between a bottom in a market like solar and a strong rebound to warrant the stock trading for a market cap of $18 billion. The issue here is that Enphase closed contract manufacturing locations in Romania and Wisconsin in an indication the business won’t approach the high of the previous up cycle.
The energy technology company still faces a lot of headwinds in returning the underlying business to growth. On the Q4 ’23 earnings call, CEO Badri Kothandaraman made the following statement:
The transition to NEM 3.0 has been a little slower than what we anticipated. Installers are still installing NEM 2.0 systems, and this has caused a delay for some of them to sell NEM 3.0 systems. The ones who started are finding the sales process a little more difficult given the complexity of the tariff structure, the added cost of batteries upfront and high interest rates. One particular challenge we hear is their lack of confidence in the payback of the systems they are selling.
The Fed doesn’t appear in any hurry to lower interest rates with strong economic growth, especially after the U.S. jobs report for January was so strong. Based on the Q1 ’24 revenue guidance and the corporate prediction of under-shipping to the market by $130 million, Enphase Energy is actually guiding to market demand in the $400 million range.
The energy technology company continues to cut the market demand number by $50 million per quarter. The investor worry here has to be that demand continues to deteriorate with more normalized energy prices reducing the desire to snap up costly solar systems, with companies like Enphase now pushing the addition of costly batteries for storage.
Expensive For Normal Demand
Though Enphase guided towards normalized quarterly sales in the $450 to $500 million range, the Q1 numbers are much more supportive of sell-through rates at a lower range. The stock has already rallied back to $130, and the company was doing $700+ million in quarterly sales when the stock was higher back last summer.
Even if normalized sales snap back towards the $500 million quarterly rate, Enphase Energy already trades at over 7x sales targets for 2025. The company needs a lot to go correct over the next year in order for sales to rebound to $2.35 billion next year.
Also remember, the large P/S multiples are usually warranted for software type businesses with higher gross margins. Enphase Energy only has non-GAAP grows margins of 41.8% before the net IRA margin benefits of 8.5%.
The numbers just don’t add up for the interest in Enphase Energy here. The solar energy company has to see a substantial rebound in demand to hit the 2025 targets, and the company needs to hit those targets in order to justify the current stock price, much less warrant positive returns from a stock price of $130.
The key investor takeaway is that Enphase Energy, Inc. is now priced for perfection. The company doesn’t provide any signs of the return of a booming solar business, especially considering with low natural gas prices and high interest rates.
Investors should consider the recent rally a gift and look for an exit point.