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About Enphase

The way I’m seeing everything at the moment, this is a short-to-intermediate-term period of last minute growth that we’re currently living in through continued gradual reduction in the federal funds rate, and given that I’ve already recently outlined my thoughts regarding current and future Fed policy in previous articles, particularly throughout this new year, all of the signals are leading me to believe that inflation hasn’t exactly been fully dealt with and that when incorporating the forces of the associated growth and policies more than likely to stem from President Trump’s upcoming second term, especially when considering the most recent Federal Reserve meeting in which the Fed alluded to the fact that instead of doing four rate cuts throughout 2025, it is penciling in two, the direct implication is that it is likely to pursue rate stabilization or rate hikes sooner than it initially anticipated. 

As always, I don’t mean to sound like a broken record, but I remain flexible, which is really just a fancy way of me saying that I could be wrong.

Serious investors must have humility.

At any rate (interest rate humor), the most recent Fed meeting did a number on the market, sending the VIX (CBOE Market Volatility Index, probably the most common equity market volatility index out there) up an astonishing 75%, right after the Fed’s announcement, and while it isn’t uncommon for the VIX to push up a bit leading into a Federal Reserve meeting, it usually doesn’t shake up the VIX 7,500 basis points. During this meeting, the Fed announced a quarter fed funds rate cut (which most, including myself, expected), bringing the rate down to 4.25%-4.50%, with the Fed focusing on continuing to stabilize the labor market, throwing shorter-term inflationary caution to the wind (in my opinion, at least), but the two-cut instead of four-cut comment is actually what shook the market up, the VIX up, and basically put every other public security in the red for the rest of that day’s trading session.

Nevertheless, that was the recent past, and investors must focus on not merely the present, but the most likely future scenario as it stands with liquidity in the market (a direct byproduct of what the Fed does with its policies, implements with rates, etc..), and while I am still in belief of my previous comments (read any of my last few articles and you’ll see) regarding rate hikes commencing in later 2025 in order to combat persistent inflationary pressures, myself actually writing this piece shortly after it was announced that the Personal Consumption Expenditures (PCE) index, at this point the most common measure of inflation, rose from 2.3% in October to 2.4% in November, adding to my thesis that inflation is indeed still a problem and when also considering the waves of additional inflationary pressures to be tacked on by virtue of President Trump having his second term, examples being tariffs on global imports into the United States, his immigration policies (likely leading to higher and stickier wages), and his overall emphasis on American manufacturing and industry (these are just the facts, not me being any ounce political), which, from my perspective, are more than likely to spur even more economic activity in this country, which is good in most cases, but when we have an inflation problem, it isn’t exactly the best timing.

All of this being said, over the next four-to-six months, I am expecting a handful of consecutive rate cuts, but then the rate tide turning in the latter half of 2025.

Bringing today’s company of interest into the picture, Fremont, California-headquartered Enphase Energy, of course, any given state of the federal funds rate matters a lot since it is the primary lever of liquidity, and I’d even posit that it matters especially to industrial technology companies such as this one, designing and manufacturing solar products such as microinverters, battery energy storage systems, as well as electric vehicle (EV) charging stations. For those that aren’t that well versed on microinverters (yeah, me too), it is basically a mechanism within a solar panel that maximizes the energy output of each panel. It is different from traditional string inverters. In getting a bit more down to brass tacks, take a row of solar panels, and let’s say there are ten panels in the row. In the past, traditional inverters worked in a way in which if one panel wasn’t performing well, the other nine would be impacted and not perform as well either, whereas with microinverters, each panel is able to power itself at maximum capacity and efficiency, independent of the other’s performances.

Microinverters are quite useful in the context of solar panels in a few different situations, including partial shading on some panels but not others, debris on some panels but not others, complex roof structures, and when panels are facing different directions, microinverters also having longer operational lifespans and also run at lower voltages (mitigating potential safety issues), with, at the end of the day, microinverters making solar panels safer and more efficient and reliable, and again, it sells other clean(er) energy infrastructure products such as EV stations and battery storage systems.

In addition to generating revenues from selling physical solar products, Enphase also generates sales through service contracts with its residential and commercial customers (i.e., solar maintenance and installation), which I like seeing in these sorts of companies being that it offers a sort of buffer for if/when core product sales soften (likely in a higher federal funds rate environment), also producing revenues through its software as a service (SaaS) arm, its cloud platform by the name of Enlighten, allowing users of its solar equipment to monitor and manage their systems, also doing a little licensing as well.

Still, in looking at the world and this company from the top-down, this is most definitely going to be a firm that is impacted by a more hawkish Federal Reserve, as when rates do rise (again, you know my present prediction, second-half-2025), borrowing and building costs will rise and a company such as this one isn’t likely to be as profitable, not to mention that demand for solar installations will decrease as residential and commercial complexes have to cut back on their budgets, and I would even take it a step further and say that this company is susceptible to the real estate market, of which I am presently finding material weak spots, with oversupply in certain growth regions (the Sunbelt, for example) paired with elevated mortgage rates (exacerbated by the prospects of inflation and prospective rate hikes in my forecast), and with the current and short-to-intermediate-terms in housing not being attractive, this is absolutely going to impact this company.

In looking more into this company and its points of pronounced strength, I found one of relative weakness (I’m not poison, believe me, but I can’t help what I find when doing research on any given company), as Enphase holds a large amount of market share in the residential solar sector, and while holding a large chunk of market share is typically more of a good thing than a bad thing, well, need I repeat my views towards the residential sector? Additionally, in learning more about its competition, specifically a company I wrote about a while back, First Solar, I found that it focuses much more on commercial and utility markets, which are better for just about one hundred different reasons, including that it is much easier to scale in a commercial setting than in a residential one, there is less volatility in commercial markets (i.e., individual consumers are far more likely to become capital-crunched than corporations and scaled utility partners and corporations consistently use more power than individual residential units), not to also mention that reports show that residential solar markets are already showing signs of saturation, and policy sensitivities too, even though I think it might be more fair to say that’s just an overall solar industry point of caution, not only a residential market concern. 

In also thinking about how federal funds rate increases would impact its other segments, in the EV station category, for instance, I recently saw a report that discussed EV buyers’ sensitivity to interest rate shifts, and while a very (very) small part of me was hoping for consumers to not be as sensitive towards rate shifts, the report explained that nearly three quarters (74%) of prospective EV buyers asserted that a rate cut would affect the timing of their purchase.

Can you even imagine what rate hikes would do to consumer sentiment? 

Higher rates mean less EV appetite, meaning less demand for charging, meaning less demand for Enphase’s EV products.

If you didn’t trust my inclinations before, just be my guest and trust the data.

I’m trying to wrap things up on the rates side of the equation and get off my soapbox, however, for the time being, although we are inching into a higher rate environment in 2025 (again, my personal forecast), between now and the first half of 2025 is probably going to involve a couple of more quarter cuts, helping a company such as this one, but with its stock (NASDAQ: ENPH) down nearly 45% over the last twelve months, an era categorized as a far more favorable, rate-cut environment, I have my initial reservations.

Of course, this stock might still have a chance if there are certain aspects of its financials that are inordinately redeeming, but from the top-down, I am not enthused at this juncture.

Let’s investigate further.

Enphase’s stock financials

Enphase has a stock price of $75.37, a market capitalization of $10.14 billion, a price-to-earnings (P/E) ratio of 171.35, all while not issuing a regular annual dividend to its shareholders, which I will most certainly not hold against the company being that it operates in both a growing and competitive sector, as to me, draining potential research and development (R&D) capital and cash in general in the form of a miniscule quarterly payout is silly for such a company.

What I will hold against this company, however, is something that is oddly no fault of its own, and that is its present price-to-earnings ratio, which appears a bit stretched given the commonly held fair value benchmark of 20, and how even with this company’s recent share price decline, shares still appear richly valued, and while, if you’ve been reading any of my recent articles, you know I am drifting away from the narrative that a P/E ratio is among the absolute most important thing with respect to a company’s valuation, as I’ve found myself morphing more into a cyclical animal (hence all of the previous liquidity and supplemental technical analysis talk), I am just going to just keep this price-to-earnings ratio in mind, as this metric isn’t ultimately going to make the stock’s price go up or down, while Fed policy will.

As it relates to the company’s balance sheet, Enphase’s executives are at the helm of almost $3.4 billion in terms of total assets and a hair under $2.4 billion in terms of total liabilities, which I deem to be slightly elevated, but context matters, and when bringing more of it into the picture in that this is an industrial technology company operating in a high-growth neck of the woods, there were always going to be some liabilities. Still, in ensuring that this company isn’t in any sort of immediate cash pinch, I looked at its total current assets and total current liabilities, and they lent me some nirvana, with its total current assets pegged at $2.4 billion and its total current liabilities at $532 million, a breakdown that makes me far more sanguine in terms of this company’s immediate liquidity. Also, as of its latest report on Charles Schwab’s platform (year-end 2023), Enphase has $1.7 billion of cash and short-term investments, adding yet another liquidity layer as well as a “can finance future growth” buffer.

Regarding its income statement, the company’s annualized revenues have been growing at a great pace, that is, between 2019 and 2022, then the growth tapering off between and during 2022 and 2023. In quantifying all of this, Enphase’s revenues in 2019 were reported as $624 million, $774 million in 2020, really skyrocketing to almost $1.4 billion in 2021 (this jump induced by COVID restrictions easing but also leading into this, or during COVID, the heightened activity in people doing home improvements (including solar installations) since they had basically nothing else to do), and the company’s revenues went even higher to $2.3 billion in 2022 (due to pent up COVID demand, but also government incentive programs, like the IPC tax credit, incentivizing American homeowners to go solar, and perhaps even higher traditional energy prices led to some added organic consumer demand as well). However, in 2023, the company’s revenues came down just a little bit, to barely below $2.3 billion, which, unfortunately for the bulls, adds to my original thesis surrounding the impacts rates have on this company and industry more broadly. Between 2022 and 2023, the federal funds rate was rising, which was the most likely demand killer, not only recording dampened demand in the US, but also in Europe, and the American regulatory landscape posed a threat to residential solar as well. Namely, California (naturally one of Enphase’s most important markets) enacted a policy change titled “NEM 3.0” that, in essence (it’s a bit extensive and I read through it so I’ll just simplify it and save you some time), vastly reduced the amount of credits residents received for using solar energy (75% reduction, mind you), leading to the company experiencing a 57% revenue drop in the subsequent quarter. Still, I want to be fair and mention that although this led to many residents shifting away from solar equipment, it led to them transitioning into batteries, which Enphase happens to also supply, which was likely the main reason sales held up as well as they did between 2022 and 2023.

Kudos to the Enphase team for adapting when necessary, but what I really want anyone to get from this is that along with the other laundry list of external variables this company has to keep track of, this somewhat new industry is subject to regulatory scrutiny, and while I personally think that countries across the globe (including this one), are, in the long run, going to transition meaningfully towards solar, albeit not as a primary energy source, but a more utilized one once the consistency and trust is there, the rest of this decade and the years that follow are likely subject to policy volatility.

With respect to the cash flow statement, Enphase’s total cash from operations have been basically tracking its aforementioned revenues, rising between 2019 and 2022, dipping slightly between 2022 and 2023, spanning between $139 million (2019) and $745 million (2022), coming down in its most recent report in 2023 to $697 million, again, tracking with its revenues.

Enphase’s stock fundamentals

According to Charles Schwab’s platform, Enphase’s net profit margin is 4.91%, which, along the lines of its competitors, can be best summarized as being good not great, as its biggest competitor in the residential space, SolarEdge, has a listed net profit margin of -158.02%, whereas its commercial foe, First Solar, has a net profit margin of a far more impressive 32.41%, yet another clear-cut advantage of focusing on the commercial side rather than residential.

At any rate, in being as forward-looking as I can and should be, I am thinking that Enphase’s profitability is going to be strained during 2025 (and maybe even 2026) due to my federal funds rate hike thoughts along with my continued inflationary concerns, and while Enphase’s net profit margin is certainly more appealing than that of its more comparable competitor SolarEdge, my outlook leads me to believe that profitability struggles aren’t that much of a wild hunch, especially when considering everything we’ve seen in this piece so far relating to just how sensitive consumers and the residential markets are to shifts in Fed policy.

Should you buy Enphase stock?

This company has some good qualities, including that it is a leader in a forward-looking field of industrial technology, it has a handful of focused revenue streams (i.e., sales of physical products, SaaS, etc..), its balance sheet is in fine shape, its revenues in recent history have been trending in the right direction, even though there’s been a recent slowdown (which I am forecasting will more than likely persist, evidently), its net profit margin is alright, and hardly anyone can say that this isn’t an adaptive company, evidenced by its previously outlined California solar-to-battery market adjustment.

However, a lot of this doesn’t matter as much if I think higher interest rates are set to rise due to inflation, and I really do not like that this company primarily tailors its products and services towards the ultra-sensitive consumer residential market, and with housing where it is today and where it is more than likely to be over the next 18-24 months, not to mention EV drivers and their rate sensitivities, all roads are leading me to offer a “sell” rating. 

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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