Enphase's stock keeps falling after longtime bull abandons buy call

By Tomi Kilgore

Solar company's stock heads for sixth straight decline, after suffering its first yearly loss in seven years in 2023

Shares of Enphase Energy Inc. fell again on Thursday after a longtime bullish analyst recommended investors stop buying, given the uncertainty over when concerns about supply in the solar market will subside.

Analyst Sophie Karp at KeyBanc Capital downgraded the stock to sector weight, after being at overweight for at least the past 16 months.

"[W]e believe the timing of recovery in demand is uncertain due to a poorly quantifiable inventory glut in the channel," Karp wrote in a note to clients. "The issue has persisted for much longer than we initially anticipated, and we believe the visibility there is low, including for the management team itself."

The stock (ENPH) dropped 3.6% in afternoon trading and has tumbled 13.9% amid a six-session losing streak. That would be the longest losing streak since the six-session stretch that ended Oct. 25.

The selloff comes after the stock plunged 50.1% in 2023, which snapped a six-year streak of gains in which the stock rocketed 26,134%.

Karp's neutral view on Enphase's stock is part of her "cautious" outlook for the alternative-energy sector, as headwinds far outnumber tailwinds.

Read: What happened to solar stocks? Investors 'pick up the pieces' after a brutal earnings season.

Among the headwinds, she expects pricing pressures and inventory gluts for the solar-equipment market, "less-than-ideal" government guidance with respect to incentives from the Inflation Reduction Act, as well as an overall fading of enthusiasm around the IRA.

Karp said falling energy prices in the U.S. and the European Union should also weigh on the sector, because that removes the sense of urgency to shift to renewables.

But Karp said "by far the biggest risks" to the solar space are the U.S. elections in 2024. She pointed out that solar stocks suffered ahead of and after the 2016 election, given the "overwhelmingly negative perception" of Republican policies for renewable energy.

"We see renewable policies as even more exposed in 2024 compared to 2016, as they have become more politicized, likely translating into worse sentiment," Karp wrote. "Given the significance of the IRA for the sector, Democrats retaining their slim majority in the Senate is even more important, from a practical standpoint, than the presidency."

Meanwhile, the only potential tailwind she sees for the sector would be if the Federal Reserve starts cutting interest rates sooner rather than later.

The Invesco Solar exchange-traded fund TAN fell 2.1% in afternoon trading and has shed 9.5% amid a four-day losing streak. The ETF dropped 26.9% in 2023, its worst yearly performance since it slid 45.9% in 2016.

Karp said she believes Enphase's valuation is by no means stretched, and she continues to like the company's long-term positioning in the solar space and its cash-generation capabilities.

"However, given the overall unfavorable setup, we believe it is prudent to take a step back and move to [sector weight]," Karp wrote.

Over the past three months, Enphase shares have tacked on 0.9%, while the solar ETF has gained 2.3% and the S&P 500 index SPX has rallied 10.3%.

-Tomi Kilgore

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01-04-24 1501ET

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