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Enphase Energy, Inc. (NASDAQ:ENPH) stock has fallen nearly 25% from its December 2022 highs, underperforming the S&P 500 (SPX) (SPY). Despite that, ENPH still registered a market-beating performance, as it posted a 1Y total return of 42%.
Hence, while buyers who chased its recent highs have suffered, investors who bought into significant dips in ENPH over the past year have ridden their way to market outperformance.
Notwithstanding, the critical question now lies in whether the current pullback could portend a more substantial collapse in ENPH’s overvaluation or another buyable dip?
We have cautioned investors in several of our past articles on ENPH, arguing that investors who have accumulated substantial gains over the past two years consider cutting exposure.
We believe the multitudinous headwinds against the continued outperformance of ENPH are looking increasingly ominous, coupled with the threat of a global recession.
Notably, natural gas prices have collapsed in Europe and the US. For example, Dutch TTF futures have fallen almost 80% from their August 2022 highs as the energy crisis normalized in Europe. Coupled with higher LNG imports and a warmer-than-expected season, the threat of a looming energy crisis has weakened tremendously.
Concomitantly, NYMEX natural gas futures (NG1:COM) have also fallen steeply, down more than 60% from their August highs, knocking out fervent natural gas bulls who bought into over-optimistic energy crisis disaster theories.
So, the critical question is, does it matter to Enphase? Of course, it does. Alternative energy, like solar energy, is much more attractive when “traditional sources” of energy like natural gas to power electricity are high.
Therefore, consumers should be less worried about surging electricity costs, as we posit those sharp spikes are likely over. The market is likely pricing in a global recession, which should curtail the demand outlook further, while LNG supply has also increased.
Enphase also warned in its filings that it competes with traditional sources of energy as it accentuated:
The viability and continued growth in demand for solar energy solutions, and in turn, our products, may be impacted by cost competitiveness, reliability, and performance of solar PV systems compared to conventional and non-solar renewable energy sources and products, prices of traditional utility-provided energy sources;- levels of investment by end-users of solar energy products, which tend to decrease when economic growth slows (Enphase 10-Q)
Also, note that the net metering headwind facing Enphase is far from over. We were surprised that there wasn’t a marked impact in mid-December when California regulators announced that homeowners would be paid lesser for “the energy sent to the grid by rooftop panels will be reduced by about 75 percent for new rooftop solar homes starting in April.”
Hence, while it will not impact existing homeowners, it could affect the forward growth cadence of the solar energy business moving forward. In addition, the NYT also highlighted that ramifications could be felt across the US, as “regulators in other states often follow California’s lead. Debates about how far states should go in encouraging the use of renewable energy have been simmering across the country.”
As such, we urge investors to watch the simmering challenge closely, as ENPH’s growth premium implies that it cannot afford to suffer mishaps against its execution.
Moreover, the company’s EV charging business segment could also face transitory headwinds as consumer discretionary spending could be impacted further. Looking at EV leader Tesla’s (TSLA) stock price (down more than 65% over the past year) should remind Enphase investors why.
Also, it should be a stark warning to ENPH “diamond hands” on the potential punishment to expect if execution weakens, exacerbated by macroeconomic headwinds that the company likely can’t control.
Why? Because ENPH remains priced at a premium. With an NTM EBITDA of nearly 38x and an NTM P/E of 50x, this drop is likely not over despite the recent pullback.
If you want to add, wait for it at a much lower price level, assess the buying support, and decide from there to improve your reward/risk.
Rating: Sell (Reiterated).
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