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While solar energy specialist Enphase Energy (ENPH) represented one of the most relevant and strongest market performers in recent years, the sudden plunge of ENPH stock on Wednesday may signal serious troubles for the economy. Therefore, investors should monitor shares and see how they respond before making a substantive move.
In particular, the skyrocketing inflation of 2022 that emboldened the fundamental case for Enphase – essentially to provide lower energy costs for concerned households – now plays a significant role in its struggles. With the Federal Reserve aggressively raising interest rates to combat accelerating prices, the consequences of said actions finally appears to have impacted ENPH stock and its ilk.
ENPH Stock Gets a Cruel Reality Check
Initially, circumstances appeared promising for ENPH stock. On Tuesday afternoon, Enphase disclosed its results for the first quarter of 2023, producing earnings per share of $1.37, beating the consensus target of $1.21 per share, according to Zacks Equity Research. Further, this tally compared very favorably to EPS of 77 cents in the year-ago quarter.
As well, revenue of $726.02 million just edged past the consensus estimate by 0.36%. Similar to the earnings front, the most recent tally handily beat out the year-ago sales of $441.29 million. For both the bottom and top line targets, Enphase beat analysts’ estimates four times over the last four quarters. So far so good, then, right?
Unfortunately for stakeholders, management had other news to share. As Reuters mentioned, Enphase expects Q2 revenue to land between $700 million and $750 million. However, this forecast sits below analysts’ estimate of $773 million, per Refinitiv data.
Further, the news agency interviewed Raymond James analyst Pavel Molchanov, who stated that net metering reform in California imposes headwinds that may negatively affect the top line during Q2. However, the expert also stated that the company performs well in Europe, with the two catalysts “essentially cancelling each other out.”
Indeed, Reuters mentioned that Q1’s revenue haul stemmed primarily from higher sales in Europe. Nevertheless, a common obstacle to growth is now making its presence known for ENPH stock and the rest of the solar energy industry.
The Fed Wants Its Say
While unfavorable reforms in California against robust sales in Europe may leave a net-zero impact, the same can’t be said about the Fed. In response to the stratospheric inflation rate, the central bank aggressively raised the benchmark interest rate to cool price acceleration. Of course, this action inherently spiked borrowing costs, which broadly hurt consumer sentiment. While the solar energy sector seemed relatively immune, the fallout in ENPH stock now suggests otherwise.
One of the clearest signals that Wall Street appears jittery about Enphase and the solar energy industry centers on dynamics associated with unusual stock options volume. Following the close of the April 26 session, total volume for ENPH hit 327,464 contracts against an open interest reading of 217,307. Further, the delta between the Wednesday session volume and the one-month average volume came out to 611.97%.
In addition, put volume reached 203,839 contracts versus call volume of 123,625. On paper, this pairing yielded a put/call volume ratio of 1.65, which suggests a bearish framework.
Fundamentally, as borrowing costs rise, the savings that households can expect from transitioning to solar might not arrive in a favorable time window. On average, the payback (breakeven) period in the U.S. for integrating solar systems is between six to 12 years. CNET cited experts that suggest most households lean closer to the latter. Add in higher interest rates and that breakeven period extends even further out.
And it’s the same situation regarding California’s net metering reform. Basically, the new policy changes the old protocol which allowed homeowners with solar panels to sell excess power to their utility at or near the full retail rate, per Reuters. With that incentive diminished, fewer people are interested in making the transition to solar.
Notably, it’s not just ENPH stock that’s feeling the heat. Related enterprises such as First Solar (FSLR) also printed significant red ink.
Analysts Believe in Enphase for Now
Unsurprisingly given the latest developments, the Barchart Technical Opinion indicator rates ENPH stock an 80% sell. This aligns with its 60-month beta which soared to 1.54. Stocks featuring volatility that match the broader equities market have a beta of 1.
Nevertheless, Wall Street analysts overall remain optimistic about ENPH stock, rating it a consensus moderate buy. This breaks down to 16 strong buys, two moderate buys and seven holds.
Moving forward, investors should exercise caution. Yes, in some ways, you can classify ENPH as possibly undervalued now. At the same time, Enphase’s core demographic – basically “real” homeowners as opposed to those who condominiums – appear to be feeling the pressure of rising interest rates. If that’s the case, lower-income families may fare poorly, causing major concerns about the economy.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
