Enphase Energy Faces Major Stock Drop Amid Industry Struggles

Enphase Energy (NASDAQ: ENPH) has seen its stock fall nearly 40% since the start of 2024. This decline reached a peak with a 15% drop on the day it released its third-quarter earnings, marking one of its sharpest declines in recent years. In contrast, its industry counterparts have also struggled: Solaredge Technologies (NASDAQ: SEDG) is down 84%, Sunrun Inc (NASDAQ: RUN) has decreased by 29%, Maxeon Solar (NASDAQ: MAXN) has dropped by 99%, and Canadian Solar (NASDAQ: CSIQ) is down by 54%. These figures highlight a broader downturn in investor sentiment toward the clean energy sector.

Declining Demand and Its Impacts

Recent quarters have revealed a significant decline in Enphase Energy’s shipments, particularly in Europe. The current imbalance of supply surpassing demand has led to power prices in Europe being reported as zero or even negative. This scenario does not bode well for new project initiation, further straining equipment manufacturers like Enphase. Moreover, challenges in the U.S. market, including public resistance leading to project delays and legal challenges, have compounded these issues. A revival in demand is closely tied to the economic health of European countries that will influence project recovery. However, according to Trefis, the worst may already be behind in demand; the question remains whether the stock’s nadir has also been reached.

Is the Worst Over for Stock Prices?

As things stand, Enphase Energy shares are trading at about 178 times trailing earnings, which may seem high. However, when evaluating sales, they are priced at approximately 8.6 times trailing revenue, a measure that appears more reasonable. This discrepancy arises because the company’s net income has fallen at a much steeper rate than its revenue over the last few quarters. On average, revenues dropped about 55% year-over-year, while net income decreased by approximately 87%. Given Enphase’s capital-intensive operations, revenue changes translate substantially into earnings, a dynamic evidenced by a relatively stable gross margin of around 45% this fiscal year compared to the previous one.

What This Means for Enphase Energy

An uptick in sales could lead to proportionately higher earnings for Enphase. A sector like clean energy, known for its growth potential, cannot remain in a downturn indefinitely. As policies supporting environmental goals toward achieving Net Zero come into play, project implementation is expected to pick up, which is the optimistic outlook we support.

A Look Back: Historical Performance

Currently, ENPH’s stock price mirrors levels seen in September 2020, around $80. The journey since has been volatile, with stock returns of 4% in 2021, 45% in 2022, and a steep -50% in 2023. Over the same period, the S&P 500 had returns of 27% in 2021, -19% in 2022, and 24% in 2023, indicating that ENPH has lagged behind the index in both 2021 and 2023. In contrast, the Trefis High Quality (HQ) Portfolio, which consists of 30 stocks, has outperformed the S&P 500 yearly during this timeframe.

Risks and Opportunities Ahead

The HQ Portfolio has delivered better returns with less volatility compared to the S&P 500, demonstrating a more stable investment experience. Given the current landscape of economic uncertainty, marked by indications of interest rate changes and tense global relations, ENPH faces the risk of underperforming the S&P again in the upcoming year. Alternatively, a significant rebound could occur.

Future Growth Potential

Determining whether Enphase has reached the lowest point in its price cycle remains challenging. However, forecasts suggest that quarterly shipment levels will begin to recover in the next few quarters. Trefis anticipates that ENPH will experience moderate revenue growth in the upcoming fiscal year, which should enhance its earnings potential. The awaited period of high demand growth may still be some time away, but such an increase in sales would likely lead to improved margins and a corresponding rise in stock prices.

[1] Returns as of 10/24/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.