Enphase Earnings: Weaker-Than-Expected European Demand Forces Another Reset to Growth Outlook

We lower our fair value estimate for no-moat Enphase Energy ENPH to $75 from $120 following the company’s third-quarter results. The primary driver of our lower valuation is a reduced long-term revenue forecast, which also results in reduced operating margins. We view shares as fairly valued.

Enphase shares are trading lower (down 17% after hours), which we attribute to the company’s weak fourth-quarter revenue guidance. Revenue is expected to decline approximately 60% sequentially in the fourth quarter after dropping 23% sequentially in the second as the company attempts to correct excess inventories at distributors in the U.S. and Europe. The company now estimates channel inventories will normalize by the second quarter of 2024 (compared with year-end as of last quarter) on account of weaker-than-expected European demand as well as California weakness. We’d anticipated the California weakness, but the Europe outlook caught us by surprise.

Europe was expected to be a relatively bright spot for rooftop solar demand in 2023 but is increasingly seeing challenges. It is becoming clearer that the robust demand growth in 2022 was a pull-forward of demand due to the Russia-Ukraine conflict (and resulting high energy prices), with us and the market extrapolating too high of growth rates into the future. We’ve reduced our 2025 revenue forecast by 30% on account of much lower European demand than previously anticipated.

One silver lining from the results is the firm’s gross margin guidance, which we view as not as bad as feared when considering the weak revenue outlook. The company expects non-GAAP gross margins of 40%-43% (excluding manufacturing credits) in the fourth quarter. While this is down 45.8% in the third quarter (excluding credits), we still view it as robust. This margin outlook stands in sharp contrast to peer SolarEdge, which issued a profit warning about a significant revenue miss (similar to Enphase), but with a much more significant decline in gross margins.