145% Tariffs Will Hurt Margins But Solar Products Will Offset

Key Takeaways

• Tariffs on Chinese imports and high interest rates in the U.S. negatively affect Enphase's margins and revenue growth.
  
• Challenges in the U.S. and European markets could hinder Enphase's growth, with financial strains affecting installers and customer demand.
  
• Diversified product expansion and strategic supply chain restructuring may boost Enphase's revenue, margins, and competitive standing in underpenetrated and resilient energy markets.

Catalysts

Designs, develops, manufactures, and sells home energy solutions for the solar photovoltaic industry in the United States and internationally.

• The newly announced tariffs of 145% on imports from China are expected to significantly impact Enphase Energy's gross margins, with an anticipated reduction of approximately 6% to 8% starting in Q3 2025. These tariffs primarily affect the batteries, as the company currently sources battery cell packs from China, leading to increased costs.
  
• Enphase Energy's U.S. revenue decreased 13% in Q1 compared to Q4 due to seasonality and softening customer demand. This reduction was partially offset by $54 million in safe harbor revenue, indicating potential challenges in maintaining steady revenue streams without relying on such measures.
  
• A major national leasing provider's financial difficulties have created a cash flow problem for installers, resulting in reduced sell-through and adding pressure on Enphase's revenue in the U.S. market. As a result, installers face difficulties managing cash flows, potentially leading to slower uptake in installing Enphase systems.
  
• The European market remains challenging with a 9% decline in sell-through, partially offset by increased revenues driven by new product introductions. However, the slower recovery in France due to recent utility rate cuts and expectant weakness in demand over the next two quarters suggests that growth may not meet expectations.
  
• High interest rates are exerting pressure on the U.S. solar market, causing reduced demand as fewer consumers opt for loans to finance their solar projects. This is expected to negatively impact Enphase Energy's revenue growth in the near term as financial conditions remain tight for installers and end-customers alike.

Enphase Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Enphase Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Enphase Energy's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.7% today to 12.7% in 3 years time.
• The bearish analysts expect earnings to reach $190.0 million (and earnings per share of $1.41) by about April 2028, up from $102.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 44.0x on those 2028 earnings, down from 68.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 2.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.51%, as per the Simply Wall St company report.

Enphase Energy Future Earnings Per Share Growth

Risks

• Enphase Energy is expanding its product portfolio, including introducing the fourth-generation IQ battery and new microinverters with gallium nitride technology, which could drive revenue growth as these products may offer cost efficiencies and performance improvements.
  
• The company's strategic move to produce more components domestically and diversify its supply chain away from China could mitigate tariff impacts and potentially improve gross margins over time.
  
• Enphase's expansion into new markets, such as Japan and distinct European markets with unique product offerings like the IQ Balcony Solar product, may lead to increased revenue streams by tapping into underpenetrated regions.
  
• The growing demand for energy resilience and the integration of solar plus battery solutions, especially with new product introductions like EV chargers, could enhance sales and improve overall market share, thus positively influencing net margins and revenues.
  
• Enphase's efforts in energy management software and virtual power plants to improve customer ROI could increase product attractiveness and customer retention, potentially leading to higher earnings and a stronger competitive position in the market.

Valuation

• The assumed bearish price target for Enphase Energy is $52.66, which represents one standard deviation below the consensus price target of $71.3. This valuation is based on what can be assumed as the expectations of Enphase Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $44.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $190.0 million, and it would be trading on a PE ratio of 44.0x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $53.43, the bearish analyst price target of $52.66 is 1.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.