Can Enphase Stock Continue Its Momentum and Turn Positive for 2024?

Enphase Energy (ENPH) stock rallied smartly last week, and has narrowed its YTD losses to just about 10%. It is still among the bottom 100 S&P 500 Index ($SPX) performers for 2024, though. Can ENPH stock continue its recent momentum and turn positive for the year?

Solar stocks have looked weak in 2024, continuing their dismal run from the previous year. Notably, in Q4 2023, Enphase stock fell to its lowest levels since October 2020. Life has come full circle for solar and clean energy companies, after the sector embarked on the rally of a lifetime in 2020 – partially aided by Joe Biden’s election as president, as he vowed to reverse his predecessor’s friendly policy towards fossil fuels.

However, a combination of high interest rates that took a particular toll on solar installations, high supply chain inventories, and rich valuations led to a steep fall in solar stocks over the last couple of years.

Late last month, JPMorgan lowered the target price for Enphase Energy and Solar Edge Technologies (SEDG) following the Intersolar Europe Conference 2024. The firm is concerned about the residential solar market in Europe, as well as low power prices in the region. It also touted political uncertainties as a potential risk for these companies. 

While both ENPH and SEDG plummeted following JPMorgan’s comments, they recovered last week.

Enphase Stock Forecast

To be sure, JPMorgan is hardly the only brokerage that is circumspect about Enphase. The stock currently has a “Strong Buy” or “Moderate Buy” rating from around 58% of the analysts who are covering the stock. The corresponding figure three months back was almost 62%.

Analysts have also gradually trimmed ENPH’s target price, and its current mean target price of $126.49 is 6% higher than Friday’s closing prices.

What Challenges Does ENPH Face?

Enphase Energy faces several headwinds in both the U.S. and Europe. First, its sales have been hampered by California’s so-called Net-Metering 3.0 (NEM 3.0) rules - which provide fewer credits to solar homeowners for the excess electricity that they sell to the grid.

Second, high supply chain inventories took a toll on its revenues. To lower the supply chain inventories, Enphase has deliberately cut its shipments, and its revenues have lagged end consumer demand for the last several quarters. The company estimates that it under-shipped by over $110 million in Q1, and expects to do so to the tune of $90 million in Q2, as well.

Third, Europe has been a particular pain point not only for Enphase, but also for other solar players, as the region's solar market has sagged. Finally, economic uncertainty and higher interest rates have also taken a toll on solar companies, as buyers have been reluctant to commit to high-value purchases like solar.

ENPH Stock Might Have Bottomed

During the Q1 earnings call, Enphase Energy CEO Badrinarayanan Kothandaraman said, “We believe Q1 was the bottom quarter.” 

Providing further color, he added, “Europe has already begun to recover, and we expect the non-California states to bounce back in Q2. California is becoming less of a wildcard, and we expect demand to stabilize and increase in the back half of 2024. We are bullish about NEM 3.0 in the long term.” 

The company expects its sell-through rate to improve in Q3, which means that it won’t need to ship below the end demand.

Should You Buy Enphase Stock?

I believe the momentum in ENPH stock should continue. Enphase is profitable, has a strong balance sheet, and is generating free cash flows to support its growth. It is expanding into new geographies and is launching new products, which should support its growth.

The stock trades at a next 12 months price-to-earnings multiple of 33x – which, if not mouthwatering, is not too exorbitant either, especially given the currently elevated broader market valuations.

ENPH Stock Could Continue Its Momentum

There is a political risk, as the possibility of Donald Trump returning to the White House is making investors in green energy companies apprehensive. However, the likelihood of a Fed rate cut has improved after soft June employment and inflation data, coupled with dovish comments from Fed Chair Jerome Powell.

Lower interest rates should not only help increase sales for Enphase by increasing the affordability of its products, but would also support an expansion of its valuation multiples, which have plummeted amid the pessimism toward growth names. 

Overall, I believe that ENPH should continue its momentum if the company can impress with its upcoming Q2 earnings, and as supply chain inventories normalize in the back half of the year, as the company is expecting.