We came across a bullish thesis on Enphase Energy, Inc. (ENPH) on Rijnberk InvestInsights’ Substack by Daan Rijnberk. In this article we will summarize the bulls’ thesis on ENPH. Enphase Energy, Inc. share was trading at $105.83 as of Sept 12th.
Enphase Energy, a leader in the solar energy sector, is renowned for its innovative solar microinverters and comprehensive energy systems, which include batteries and car chargers. With a significant global footprint, Enphase holds a dominant market share of nearly 50% in the U.S. and around 40% globally in the microinverter market. This strong position aligns well with the anticipated long-term growth in the solar industry. Despite these strengths, Enphase has faced substantial near-term challenges, including a 65% drop in its stock price over the past year due to disappointing financial performance and industry headwinds.
Recently, Enphase released its Q2 earnings, which, at first glance, appeared underwhelming with revenue of $303 million—down 57% year-over-year. The company shipped only 1.4 million microinverters in the quarter, a sharp decline from 5.2 million the previous year, largely due to a strategy of undershipping to normalize channel inventory levels amid a drop in solar installation demand caused by rising interest rates. This resulted in Enphase intentionally limiting shipments to $303 million against an actual demand of $396 million, making the revenue decline seem worse than it was. Encouragingly, management announced that inventory levels normalized by the end of Q2, suggesting a potential rebound in revenue for the remainder of the year.
Regionally, both Europe and the U.S. showed sequential revenue improvement, with the U.S., which accounts for 65% of Enphase’s revenue, seeing a notable 32% sequential growth. The positive shift in California’s regulatory environment, particularly with the adoption of NEM 3.0, has also become a tailwind, driving a higher battery attach rate and increasing revenue per account. While Europe has not yet experienced the same level of recovery, it remains a critical growth market with significant long-term potential.
On the financial front, Enphase maintained a robust gross margin of 47.1%, bolstered by benefits from the U.S. Inflation Reduction Act (IRA). Excluding these benefits, the gross margin was still a healthy 41%. The company also reported positive free cash flow of $117 million, maintaining a solid balance sheet with $1.65 billion in cash and $1.2 billion in debt. Despite high stock-based compensation levels, Enphase is managing dilution by repurchasing shares, buying back $100 million worth in Q2.
Looking ahead, Enphase has revised its guidance for Q3, projecting revenue between $370 million and $410 million, a 29% year-over-year decline but an improvement over the previous quarter. The company’s healthy backlog, significant market share, and promising long-term outlook, driven by the growing solar market, support its current valuation. Trading at 22x next year’s earnings, Enphase remains an attractive investment, with a projected target price of $162 by the end of 2026, reflecting potential annual returns of over 13%. Despite short-term volatility, Enphase offers compelling growth prospects and remains a solid buy for long-term investors.
Enphase Energy, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 42 hedge fund portfolios held ENPH at the end of the second quarter which was 41 in the previous quarter. While we acknowledge the risk and potential of ENPH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ENPH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.