Enphase: Commercial Entrance, Asset Light Strategy May Trigger Its Eventual Recovery

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Enphase Energy remains a Buy for investors looking to capitalize on its prospective commercial success and inherent asset-light strategy.With residential installations only comprising over 20% of the ...

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(NASDAQ:ENPH) in January 2024, discussing the early signs of optimistic reversal in its investment story, with the Fed's potential pivot in Q1'24 likely to bring forth expanded residential solar installations. After the bounce from the October 2023 bottom, it appears that the solar investment thesis has improved drastically, offering interested investors a more viable entry point, resulting in our Buy rating then. In this article, we shall discuss why ENPH remains a Buy for investors looking to capitalize on its prospective commercial success and the inherent asset-light strategy, well-balancing the demand destruction observed in the residential solar market. With an excellent upside potential over the next few years, the stock offers a relatively attractive risk/ reward ratio, despite the inherent premium observed in its valuations and the elevated short interest. ENPH Continues To Offer A Compelling Investment Thesis, Given The Inherent Bullish Support For now, ENPH's asset-light strategy has paid off extremely well, with the company only recording $15.68M in restructuring and asset impairment charges in FY2023, despite ceasing its contract manufacturing operations at two international locations. As a result, we can understand why there have been minimal impacts on its bottom lines, as observed in the expanding adj gross margins of 50.3% (+1.9 points QoQ/ +6.5 YoY/ +13 from FQ4'19 levels of 37.3%) despite the impacted top-lines at $302.57M (-45% QoQ/ -58.2% YoY) in FQ4'23, partly aided by the IRA benefit. With ENPH strategically ramping up its US-based contract manufacturing, thanks to a net IRA benefit of up to $14M for 500K units for US-made microinverters in FQ1'24, we believe that its upcoming earnings results may remain decent. For now, the management has guided FQ1'24 revenues of $280M (-7.4% QoQ/ -61.4% YoY) and adj gross margins of 45.5% (-4.8 points QoQ/ -0.2 YoY) at the midpoint. Based on these numbers, it seems that ENPH still expects weak residential solar demand in the US, which has been declining drastically to net sales of $1.46B (-17% YoY), well-balanced by the growing traction internationally to $821.67M (+44% YoY) in FY2023. Based on the growing cash, cash equivalents and marketable securities on the balance sheet at $1.69B (+4.9% YoY) and stable long-term debts of $1.29B (inline YoY), with only $95.96M due in 2025, we believe that the company remains well capitalized to weather the near-term uncertainty. In addition, ENPH's microinverter offerings are increasingly geared to enter the commercial markets, and likely, utility in the intermediate term. This is attributed to the launch of its new IQ8 Commercial Microinverters in November 2023. This builds upon the company's previous commercial involvement in the community solar farm in Wisconsin and a 4.5 MW microinverter-based solar installation in Karnataka, India. With residential installations only comprising over 20% of the overall capacity installed in the US, it is unsurprising that ENPH is looking toward the commercial market to drive future growth. This is especially true since residential demand has declined as borrowing costs rise, with the Fed expecting a normalized economy only by Q4'26. With residential consumers looking at a nearly doubled solar payback period as the market transitions to NEM 3.0, attributed to the hefty costs of storage batteries, it is unsurprising that ENPH has faced tremendous headwinds while having to embark on inventory write-downs. Moving forward, if ENPH can successfully break into the commercial and utility market in the US, we may see the company generate renewed growth since microinverters are integral to complex solar installations. This is especially true since the US market recorded an impressive 32.4 GWdc in new solar installations in 2023 (+51% YoY), with most of the growth attributed to utility-scale installations at 22.5 GWdc of capacity (+77% YoY). Interested readers may refer to my recent First Solar, Inc. (FSLR) article here, for an in-depth discussion on the cadmium telluride utility solar investment thesis, which triggers the company's fully booked backlog through 2026 and staggered deliveries through 2030. The Consensus Forward Estimates Seeking Alpha As a result of its new growth opportunities, we can understand why the market has quietly priced in an accelerated top/ bottom-line growth at a CAGR of +30.8%/ +45.1% between FQ4'23 (annualized) and FY2026. This is compared to the previous estimates of +14.6%/ +10.3% and historical growth at +48.6%/ +113.2% between FY2018 and FY2023, respectively. ENPH Valuations Seeking Alpha Then again, while ENPH may be able to achieve the accelerated growth rate, it is uncertain if the premium FWD P/E valuations of 35.45x and FWD Price/ Cash Flow valuations of 33.51x are warranted for now. For context, the stock is trading higher than the 1Y mean of 30.18x/ 20.60x, though moderated from its 3Y pre-pandemic mean of 48.72x/ 45x, respectively. At the same time, ENPH's valuations appear to be elevated compared to its solar inverter peers, including SolarEdge Technologies, Inc. (SEDG) at 15.2x/ 74.7x (prior to the unprofitable FQ4'23 earnings call) and ABB Ltd (OTCPK:ABBNY) at 21.2x/ 19.54x, respectively. While ENPH's microinverters may be rated as the best for residential use, it remains to be seen how well the new IQ8 Commercial Microinverters may perform compared to its established and more affordable competitors in the commercial and utility markets. As a result of the uncertainty, we believe that ENPH's current valuations appear to be somewhat expensive.  So, Is ENPH Stock A Buy, Sell, or Hold?  ENPH 3Y Stock Price TradingView For now, ENPH appears to be well-supported at its October 2023 bottom of $70s, with the recent recovery to $110s further demonstrating the growing bullish support. Based on the FY2023 adj EPS of $4.41 and the current stock prices of $115.24, it appears that the market has temporarily awarded the stock with a TTM P/E of 26.13x, notably discounted compared to its historical means. Based on a similar P/E assumption and the consensus FY2026 adj EPS estimates of $6.77, there seems to be an excellent upside potential of +53.5% to our long-term price target of $176.90. Therefore, depending on the individual investor's portfolio allocation, the stock seems to offer a relatively attractive risk/ reward ratio, especially given its discounted valuations and excellent upside potential.  As a result, we are cautiously maintaining our Buy rating for the ENPH stock, though with no specific entry point since it depends on individual investors' dollar cost averages and risk appetite, especially given the elevated short interest of 7.68% at the time of writing.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426629276"}