Market Leadership Amidst Increasing Competition Won't Hurt Solid Revenue Growth

Enphase Struggles To Recover As Management Downgrades Growth Estimates

• Enphase is slowly recovering sales from the drop in the last 12-months. I maintain that 2024 will be a down year, and the company will start recovering in 2025.
• The U.S. market will be the basis for recovery as European industry is in distress.
• I am revising down my SAM estimates for 2029 from 50% to 40%, targeting revenue of $3.6B.
• The success of Enphase is dependent on sales, so I am comfortable maintaining my profit margin estimate at 20%.
• 2024 is turning out worse than I expected in my original narrative.

Enphase published their Q3’24 report, and the stock dropped more than 16% on the announcement.

Revenue was $380.9M, down 30% YoY, and up 25.5% versus the previous quarter. This indicates that demand is picking back up and the worst of the demand slump is behind Enphase.

Enphase: Financial results ending Q3 2024

Operating expenses were 33.7% of revenues vs. the 28.5% one year ago. The company continues to spend more while getting relatively lower revenues. 

The fluctuation in revenue per operating expenses isn’t a value judgment on the company (they have been relatively consistent with the spend), but an indication that sales are highly dependent on external factors such as NEM regulation, consumer demand, tax credits & subsidies. To this end, analyzing the direction of the economy is just as important for ENPH investors as analyzing the company and product itself.

On a geo-segment basis, quarterly revenue in the U.S. increased about 34% from last quarter, and dropped 15% in Europe during the same period. It seems that the U.S. consumer is rebounding while Europe continues to decline. Considering the economic weakness in Germany (1, 2), I don’t expect the situation in the European market to improve soon.

A Stagnating Outlook Can Move The Stock Towards Its Present Value 

Enphase came out with a Q4 revenue forecast in the range of $360M to $400M. 

While this has a chance to produce higher revenues than the Q3 result at $380M, investors should be mindful that the estimate is $10M lower than their previous forecast for Q3 (when ENPH made $380.9M), which ranged from $370M to $410M. 

In other words, the midpoint forecast of $380M for Q4 is 2.6% lower than the one in Q3.

Management using performance comparisons from YoY to QoQ is not common, and is likely intended to serve as an indication that sales are picking up after a weak-demand year. While this is true, the forecast downgrade indicates that we may not be able to expect this acceleration to continue, and could be due for another slow quarter.

In the absence of the expectation of growth, we may see the valuation of the company shifting from a premium towards the value of what the company can produce in the near future. 

Valuation Revision

I am downgrading my SAM share for Enphase from 50% to 40%, resulting in around $3.6B for 2029. Most of the decline is tied to my commercial sales SAM estimate, as companies tighten their budgets on discretionary items, while consumers are kept resilient by government incentives.

I still expect the company to be able to reach 50% of its SAM. However this will come later, so it is no longer incorporated into my present value.

For 2025 I expect the company to be able to increase sales to $1.7B and grow to $3.6B in 2029. 

The company is well structured, so I’m maintaining my margin estimates at 20%, leading to a 2029 net income estimate of $720M. At a 23x PE I get a 2029 value of $16.6B, around $120 per share. Discounted back using my 9.7% rate, I get a revised present value at $10.4B or $76.7 per share.