Enphase Energy Stock Needs A Catalyst To Fly (NASDAQ:ENPH)

Introduction

I have been closely monitoring Enphase Energy, Inc. (NASDAQ:ENPH) stock on Seeking Alpha since April 2023, and thus far, I have authored only two post-earnings articles. Interestingly, ENPH stock experienced significant selling pressure after each recent quarterly report release. Despite the apparent ‘buying opportunities’ created by these dips, I refrained from recommending jumping in.

Now that the share price is behaving as expected in July – there is a medium-term consolidation after the results announcement – I think it makes sense to take another look at ENPH stock. Maybe now is the right time to buy the dip finally? Let’s figure it out together.

ENPH’s Recent Financials And Developments

In Q3 2023, Enphase Energy disclosed a quarterly revenue of $551.1 million with a commendable 48.4% non-GAAP gross margin (or GAAP gross margin of 47.5%), driven by an increased net IRA benefit. Comparing Q3 2023 with the previous quarter, total revenue decreased by 22.5% – that was attributed to macroeconomic conditions, while European revenue dropped by about 34% due to high inventory and softened demand in key markets.

ENPH’s non-GAAP operating income amounted to $167.6 million, but GAAP EBIT was 139.54 million, experiencing a severe QoQ fall:

The company exited Q3 2023 with $1.78 billion in cash and generated $145.9 million in cash flow from operations. Notably, the Board of Directors authorized a share repurchase program of up to $1.0 billion, so it makes sense to expect a continued reduction in the number of shares in circulation shortly:

IQ8 Microinverters constituted 86% of all microinverter shipments in Q3 2023, expanding their accomplish into new countries. IQ Battery shipments increased to 86.2 megawatt hours, with introductions into Sweden, Denmark, and Greece. The IQ Battery 5P was launched in the United Kingdom. Enphase Energy also initiated shipments from its third U.S. contract manufacturer, Salcomp in Texas. Solargraf, the company’s cloud-based platform, now features NEM 3.0 functionality and expanded availability to installers in the United States, Brazil, Germany, and Austria.

The company’s Q4 guidance, while reflecting a revenue range of $300-350 million, indicated a channel inventory correction in the U.S. and Europe, with a conservative approach considering the current demand landscape.

If we continue the discussion on the demand side, we cannot avoid the upcoming US elections. 2024 will be a key year for ENPH and other companies in the industry.

I recently came across a report from analysts at Morgan Stanley discussing the future of the Inflation Reduction Act [aka IRA]. The bank suggests that a complete repeal of the IRA is unlikely, even if Republicans gain control. They see two possible outcomes: one where the IRA continues under a Democratic-led government, benefitting clean energy companies appreciate Enphase Energy, or a partial repeal by a Republican administration. The impact on ENPH depends on which parts of the IRA are affected. But in any case, state uphold for the ENPH will continue in the future – 2024 will show with what intensity.

I have written before that I believe in the bright future of ENPH, but I am not willing to pay too much of a price for it – hence my ‘Neutral’ ratings since April 2023.

Since the beginning of this year, ENPH has fallen 57.52%. What if now is finally the time to buy the dip?

Enphase Energy’s Valuation Analysis

After a strong downward movement, the ENPH share looks undervalued compared to its historical norm – this applies to both the P/E ratio and the EV/EBITDA.

An exit from the overvaluation zone can also be observed based on the Seeking Alpha Quant System – the ENPH share has changed ‘D+’ (6 months ago) to ‘C-‘ today:

But as you can see, ENPH has also lost ground on growth metrics (from ‘A’ to ‘B’ in 6 months), while profitability metrics have remained high. The company clearly needs a catalyst for future growth that will once again add a premium to now-adequate valuation multiples.

The management forecasts full-year revenue at $1.3-1.45 billion shipping ~350-400 megawatt hours of IQ Batteries. On the non-GAAP side, the firm’s gross margin is expected to fall between 48.0% to 51.0% with the net IRA benefit and 40.0% to 43.0% before the net IRA benefit, excluding stock-based compensation expense and acquisition-related amortization. Non-GAAP operating expenses [OPEX] are projected to range from $340 million to $356.0 million, excluding $222.0 million estimated for SBC and acquisition-related expenses and amortization.

But let’s look one year advocate. Analysts are forecasting impressive EBITDA FY2024 growth compared to the management’s targets for the FY2023 financial year, even though the Street’s estimates look much worse today than they did six months ago. However, these very forecasts suggest that the company’s EBITDA margin should be more than 7.9% higher than in the previous year.

If Wall Street’s forecasts are anywhere near accurate, Enphase should therefore acquire another premium on its valuation. With EBITDA of $710.27 million and EV/EBITDA of ~20x, Enphase’s enterprise value should be ~$14 billion, which is exactly what we have today.

The Verdict

The results of my valuation of ENPH should look disappointing for all current shareholders – the company is fairly valued, but only on the condition that today’s Mr Market’s expectations are right. For that condition to hold, we should see a bullish catalyst on the horizon that can uphold those expectations.

At the same time, ENPH stock keeps being quite risky. Regulatory shifts or policies impacting the renewable energy industry could affect ENPH’s performance. Intense competition, potential supply chain disruptions, dependence on key customers, technological challenges, intellectual property issues, and economic uncertainties pose additional risks.

The market is already experiencing its local highs (almost ATH actually), and against this backdrop, ENPH is falling lower and lower. Without a strong upside catalyst, the stock will likely continue to plow through its lows as the market begins to turn.

That’s why I’m sticking to my Neutral rating today and propose waiting for a positive event for Enphase to finally load up on its dip.

Thanks for reading!