Enphase Energy Inc. Faces Challenging Times Amidst Demand Reduction

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Enphase Energy Inc., a prominent solar products maker, is experiencing a significant decrease in demand across Europe and the United States, particularly in California. Chief Executive Badri Kothandaraman shared these insights during a recent conference call, following the release of an underwhelming third-quarter earnings report and a discouraging fourth-quarter outlook.

As a result of this news, Enphase Energy Inc.’s stock (ENPH, -14.12%) plummeted by 16.2% in morning trading. This decline positions the company as the top decliner among the S&P 500 index, heading towards its lowest closing since September 28, 2020. The stock’s value has already dropped by approximately one-third in October alone, amounting to a staggering $5.4 billion loss in market capitalization. It is worth noting that this performance ranks as the worst monthly decline since March 2020 when the stock tumbled by 34.1%.

During the call, Kothandaraman acknowledged that the company had been deliberately “under-shipping” products to end markets as a reflection of an inventory correction occurring across the United States and Europe. He anticipates this correction to persist into the first quarter of 2024, eventually normalizing by the second quarter. These insights provide the answer to a question raised by Kothandaraman himself on the call: “So, what has changed since 90 days ago when we told you that inventory levels would normalize by the end of Q3?”

Kothandaraman further elaborated that the fourth-quarter revenue outlook ranging from $300 million to $350 million primarily accounts for the aforementioned “under-shipping” strategy, resulting in a shortfall of $150 million in products reaching the end markets due to excessive channel inventory.

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Enphase Third-Quarter Revenue Falls, Analysts Downgrade Stock

Enphase, a leading provider of solar energy solutions, reported a drop in revenue for the third quarter. While the company’s revenue fell both in Europe and the U.S., the decline in the U.S. was primarily impacted by a drop in sales from California.

In Europe, revenue dropped by 34% compared to the second quarter, following sequential increases in both the first and second quarters. In the U.S., revenue fell by 16% sequentially, with previous declines of 12% in the second quarter and 9% in the first quarter.

The decline in U.S. revenue can be attributed to the implementation of California’s new net metering program, NEM 3.0. This program reduced the credits that residential customers can receive for generating excess solar energy. As a result, microinverter sales fell not only in California, but also by 4% sequentially outside of the state.

Enphase’s CEO, Kothandaraman, expressed that it will take some time for the company’s installers to fully transition to NEM 3.0 and stabilize sales to levels seen under the previous program, NEM 2.0.

Following the release of Enphase’s third-quarter report, several analysts have downgraded the company’s stock and lowered their price targets. FactSet data shows that at least four out of 39 analysts downgraded Enphase, while 16 analysts have cut their price targets.

Despite these downgrades, there are still 18 bullish analysts who remain optimistic about Enphase’s future. In fact, the average analyst target of $127.15 implies a potential upside of about 58% from current levels.

As a result of these developments, Enphase shares have dropped by 51.7% over the past three months, while the Invesco Solar ETF TAN has declined by 39.6% and the S&P 500 has shed 8.5%.

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