Enphase Energy CEO explains why the inventory problem worsened so much in just 90 days

By Tomi Kilgore

Solar products maker's stock tumbles toward a 3-year low after a rather disappointing revenue outlook

'We have seen a substantial demand reduction in Europe. We have also seen the U.S. market continue to fall, driven by California.'Chief Executive Badri Kothandaraman

That statement by Enphase Energy Inc.'s CEO was made late Thursday on a conference call with analysts, according to an AlphaSense transcript, that followed a disappointing third-quarter earnings report and an even worse fourth-quarter outlook.

The solar products maker's stock (ENPH) tumbled 16.2% in morning trading, enough to pace all of the S&P 500 index's SPX decliners and to put it on track for the lowest close since Sept. 28, 2020.

The stock has lost about one-third of its value so far in October, wiping $5.4 billion in market capitalization. That would be the worst one-month performance since it sank 34.1% in March 2020.

On the call, Kothandaraman said the company was "under-shipping" products to end markets to reflect an inventory correction in the U.S. and Europe, which he expected to continue in the first quarter of 2024 and normalize in the second quarter.

So the above statement about weakening demand actually answers a question he himself posed on the call: "So, what has changed since 90 days ago, when we told you that inventory levels would normalize by the end of Q3?"

Kothandaraman noted that the fourth-quarter revenue outlook of $300 million to $350 million essentially reflects the "under-shipping" of products to end markets by $150 million due to excess channel inventory.

But add the under-shipment to the top of the guidance range and you get $500 million, which was still well below the FactSet consensus as of late Thursday of $565.8 million. As of Friday morning, the consensus has fallen to $430.1 million.

In the third-quarter report released after Thursday's close, the company said revenue in Europe dropped 34% from the second quarter, which followed 25% sequential increases in both the second and first quarters.

In the U.S., third-quarter revenue fell 16% sequentially, after falling 12% in the second quarter and declining 9% in the first quarter.

Most of the U.S. weakness is due to California, as microinverter sales fell 4% sequentially outside of California and tumbled 25% in the state. The reason for the California issue is the state implemented a new net metering program, NEM 3.0, which cut the credits residential customers can receive for generating excess solar energy.

"It will take a few more quarters for our installers to fully transition to NEM 3.0 and normalize sales to NEM 2.0 levels," Kothandaraman said.

No less than four of the 39 analysts who cover Enphase have downgraded the stock in notes released Friday, according to FactSet data, while at least 16 have cut their price targets.

That left 18 of the analysts bullish on the stock, while 20 were neutral and one was bearish. Even with all the price-target cuts, the average analyst target of $127.15 implied about 58% upside from current levels.

Enphase shares have now plunged 51.7% over the past three months, while the Invesco Solar ETF TAN has tumbled 39.6% and the S&P 500 has shed 8.5%.

-Tomi Kilgore

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10-27-23 1122ET

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