In 2022, Enphase rewarded investors with a 44% return vs the Nasdaq’s decline of 33%. During this time, Enphase surpassed consensus expectations each quarter through a combination of higher sales and margin expansion. For Q123, the market is expecting $1.22 eps, an increase of 54% from 2022.
Q422 ended on a solid note which we wrote about here. For 2023 ytd, Enphase is down about 15%. We believe this is primarily due to lack of visibility into the short-term outlook for US residential solar installations that was exacerbated by the SIVB failure which we wrote about here.
With that in mind, Enphase is due to report Q123 earnings on 4/25/23. These are the key factors we will be monitoring in the earnings release.
1. Continued positive momentum in the European business
2. Order visibility at US residential installer level
3. Status of US based manufacturing operations
4. Potential earnings benefit from Inflation Reduction Act corporate tax credits
We will discuss each and what we’ll be looking for in the earnings call.
1. European Business
Currently, Enphase’s revenue breakdown is 71% US and 29% International. The main international markets are Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. Q4 revenue was up 21% sequentially and 130% year on year. Enphase is on track to introduce the IQ8 inverter into new countries shortly. Meanwhile, q4 ended with a record sell-through and low inverter inventories at the channel level, reflecting continued healthy demand.
Enphase ended 2022 with a quarterly production capacity of 5 million units. They are due to begin manufacturing in Romania which will manufacture an additional 1 million units.
We will look for continued positive momentum in Europe and entry into new countries.
2. Installer activity
Despite a strong q422 report and solid q123 guidance Enphase has underperformed this year. We believe it is due to these Q4 comments.
“Let’s now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have a 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us we saw a more pronounced seasonality in January than normal.”
This “more pronounced seasonality in January than normal” took some air out of an otherwise solid earnings report. In addition, negative sentiment has also played a role. For example, there were concerns over the impact that technology sector layoffs may have on demand. Meanwhile, the rainy winter in CA – where Enphase derives 20% of revenues – was another factor that raised concerns that installations may be delayed.
SIVB’s subsequent collapse presented another potential headwind. The market is waiting to see if there’s any SIVB fallout at the installer level and consumer level. Module/Inverter manufacturers typically sell to the installers who then sell to the consumer. Installers typically provide financing to the consumer. So there is a concern how the SIVB fallout may impact the installers' ability to finance. This has been the biggest driver in the divergence in solar stock prices. After SIVB’s collapse the market punished those companies that relied more on US banks. Generally speaking, those that didn't rely on US banks for financing were viewed as being better positioned to weather the storm.
For example, CSIQ has held up better because it relies on Chinese banks. On the other hand. RUN had received loans from SIVB in the past and had an active relationship. NOVA disclosed that it was in talks with the DOE to indirectly guarantee $3b in loans it is seeking from a US bank. So far, Enphase has not given any indications that financing is a problem. Starting last week, banks have begun to announce Q1 earnings and so far indications are that the SIVB impact has been limited.
We will look for comments from Enphase on activity levels at the installer lever and order visibility.
3. Status of US based manufacturing capacity
The commencement of Enphase’s US based manufacturing is a key catalyst from an operational and earnings perspective. We will discuss the operational importance here.
Currently, Enphase outsources all of its manufacturing to electronic contract manufacturers (ECM) mainly based in Asia. Currently, these ECM’s have the capacity to manufacture 5 million units a quarter. Enphase has plans to use a US based ECM to manufacture inverters in the US. Once that is finalized, Enphase will manufacture an additional 5 million units per quarter in the US that will commence in the 2nd half of 2023. They are targeting to produce a total of 10 million units by the end of 2023.
We will look for an update on the status of the US based ECM manufacturing. The timing of which will be a critical driver from an earnings perspective which we will cover next.
4. Potential earnings benefit from Inflation Reduction Act corporate tax credits
We have recently written about the key provisions in the Inflation Reduction Act.
Briefly, those companies that can claim the corporate tax credit (IRATC) are able to deduct the amount from the cost of goods sold which has a direct impact on gross margins and earnings per share.
The amount that can be claimed depends on several factors and will vary for each company. For example, how much is actually manufactured in the US and when needed how much content is procured from countries which the US has free trade agreements with.
Given Enphase’s reliance on ECMs in the manufacturing process, Enphase will not be able to claim the full IRATC. Once Enphase starts using an ECM with US based manufacturing, it will have to “give away” a portion of the IRATC to the ECM.
However, Enphase can still potentially benefit from the IRATC portion that they keep. In the q4 call, they indicated a net $20 to 30 IRATC benefit to them once their US based ECM begins to manufacture units. Enphase has targeted 5m units by the end of 2023. The timing of which is important. The sooner it is online, the sooner they can realize the IRATC in their earnings.
Using the same IRATC earnings framework in our previous IRA piece. We’ve put together a scenario analysis with three assumptions:
· Scenario 1 – 100% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter
· Scenario 2 – 50% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter
· Scenario 3 – 25% of the planned US production is eligible for the IRATC and the impact on gross margins if they receive, $20, 25 or 30 per inverter
We’ve used scenario 2 as our base case. As can be seen in the blue highlight, at $25 per inverter, the impact on gross margins is potentially 47% compared to 42% ending in 2022.
This is currently not yet reflected in consensus expectations.
After the earnings release, we will look for further details on the timing and impact of the IRATC.
Analysts’ comments going into Q123
Despite the negative sentiment impacting the sector, analysts expect Enphase to report solid Q123 earnings.
- Enphase Energy named short-term buy idea at Deutsche Bank. Analyst Corinne Blanchard placed a "Catalyst Call: Buy" on shares of Enphase Energy as a short-term investment idea. Enphase has been a material underperformer year-to-date, with the stock down 24% versus a 20% gain for its direct peer group, driven by a cautious tone from management in early January on U.S. residential demand and origination trends in the California market, the analyst tells investors in a research note. This has opened the opportunity for an attractive valuation level, says the firm. It believes the stock is well positioned in the short term and expects a "strong" Q1 earnings beat.
- Piper Sandler analyst Kashy Harrison upgraded Enphase Energy to Overweight from Neutral with an unchanged price target of $255. The analyst says Q1 U.S residential solar originations and sales were more favorable than feared, suggesting the U.S. is more likely to decelerate than decline during 2023. Decelerating U.S. coupled with significantly more international momentum than anticipated earlier this year may drive 40% sales growth for Enphase in 2023, the analyst tells investors in a research note. The firm views the company's Q1 earnings as a "critical update capable of validating" its view that Enphase can deliver attractive earnings growth within the current environment.
- KeyBanc lowered the firm's price target on Enphase Energy (ENPH) to $311 from $363 and keeps an Overweight rating on the shares. The firm expects residential solar levered names to have a light Q1, as poor weather in key markets such as CA impacts deployments negatively. Nonetheless, KeyBanc also believes that Enphase is likely to deliver a solid quarter toward the top end of its Q1 guidance and produce above-consensus guidance for Q2. The firm is seeing indications of the company taking some market share from SolarEdge (SEDG).
Consensus is forecasting solid year over year EPS and Revenue growth.
Stock attributes
These are Enphase’s stock attributes that we continue to like.
- FCF generation, FCF yield currently 2%
- Valuation at lower end of historical range
Recommended Reading:
Inflation Reduction Act – How and which companies will benefit? First Solar Deep Dive
Enphase Q4 Earnings: A Perfect 10
Solar Stocks Lead The Market This Year As Energy Crisis Heats Up
Solar Stocks: Enphase, Stem and First Solar