Solar panels are spreading across the globe at a record pace, fueled by tax breaks and ambitious climate goals. The U.S. is installing panels fast, too—so many that solar power is expected this year to account for more than half of new electricity capacity for the first time ever. But solar stocks haven’t come along for the ride. Weakness in some key product areas, including residential rooftop systems, has sunk several stocks in the industry.
None has fallen from grace quite as hard as
Enphase Energy
(ticker ENPH), which entered the year on a six-year winning streak that included two years when the stock more than quintupled. It’s down 54% this year.
Enphase makes key components for the residential market, which is still growing but faces new challenges. High interest rates and more-stringent rules for solar panels in California have scared off potential customers and led to uncertainty in the industry.
Enphase issued a weak third-quarter sales forecast, causing the stock price to collapse so fast that it now trades at 21 times its expected earnings over the next year, the lowest level since the depths of the pandemic. A stock that normally trades at double the price/earnings valuation of the broader market is now getting just a 10% premium.
The selloff looks too steep. Enphase remains a crucial supplier of solar equipment in the U.S. and elsewhere, with a network of installers and distributors around the world. Its earnings are expected to grow 10% this year to $5.07 per share, and more than 30% in each of the following two years, hitting $8.79 in 2025.
Unlike solar peers, Enphase is solidly profitable, so it doesn’t need to tap increasingly expensive debt markets to fuel its growth. In fact, the company has more cash than debt on its balance sheet and announced a $1 billion buyback plan in July.
Company insiders, who have a history of selling shares, have lately been buying them up. Evercore analyst James West thinks the stock can climb back to $220, up more than 80% from its recent $120. He values the shares at 24.5 times his estimate for 2025 earnings per share of $9, a tech-like multiple that he says is more in line with its growth prospects. “I think there’s going to be a rebound here,” he says.
Enphase, based in Fremont, Calif., was founded in 2006, a time when U.S. solar manufacturing was on the precipice of a steep decline. China had begun investing heavily in solar panel development, grabbing market share from the U.S. and other countries. Enphase was able to avoid the fate of some other solar players because it doesn’t make the panels themselves, a business dominated by Chinese firms that have continually cut prices.
Instead, Enphase builds inverters, which are high-tech devices that convert the direct current produced by solar panels into the alternating current used in homes. Enphase’s so-called microinverters operate differently from products made by competitors. They’re placed directly against the solar panels, allowing them to better transmit data and more efficiently adjust power levels to maximize the system’s output. The products have gained such a following among installers and distributors that the company’s sales have doubled roughly every two years.
The company entered 2023 in strong shape, after sales rose 69% in 2022. But conditions quickly soured. High interest rates have caused consumers throughout the U.S. to delay large capital purchases like solar panels. And in California, the state with the most residential solar panels installed, new rules have made it less lucrative to transition to solar.
As the market slowed, Enphase’s inventory swelled. In the current quarter, it expects sales to fall about 20% sequentially. The stock sold off sharply after that guidance was announced.
CEO Badri Kothandaraman has a plan to bring Enphase out of its doldrums, and he expects the third quarter to represent a bottom. For one thing, he tells Barron’s, the company is expanding quickly outside the U.S., particularly in Europe. The war in Ukraine has sped up the energy transition in Europe, with homeowners quickly adding solar panels to wean themselves off of pricey natural gas.
Kothandaraman thinks the total market opportunity in Europe—where energy security and environmental goals have become higher priorities—is twice as big as the U.S. market. Tapping into that growth, and increasing solar adoption elsewhere, should balance Enphase’s revenue mix in the years ahead. In 2022, the U.S. accounted for 76% of its revenue. Ideally, its sales will eventually be split evenly three ways among Europe, North America, and the rest of the world, Kothandaraman says.
Enphase has also expanded its product offerings beyond inverters; 10% to 15% of its sales are from battery packs that allow homeowners to better manage their power needs or disconnect from the grid. The company also offers electric-vehicle chargers, and an app that lets homeowners monitor their systems. West says Enphase’s deep existing relationships with solar installers should give the company a leg up in selling those products.
The longer-term opportunity in U.S. rooftop solar is still large, particularly once interest rates deflate. After a 3% drop in 2024 due to the lagging effect of the change in California rules, rooftop solar capacity should grow 8% a year on average from 2025 to 2028, says energy research firm Wood Mackenzie.
As Americans embrace the electrification of their homes—solar panels, electric cars, heat pumps, and more—Enphase is well positioned to become a central player. Investors might want to plug in now.
Write to Avi Salzman at [email protected]
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