Enphase Earnings: Slowdown in U.S. Rooftop Solar Demand Weighs on Outlook

We lower our fair value estimate for no-moat Enphase ENPH to $165 from $180 following first-quarter results. The drivers of our fair value change are a reduction in our volume and gross margin forecast for the company’s microinverters. Enphase shares are trading sharply lower (down 20% at the time of writing) as investors adjust to a lower growth outlook driven by U.S. rooftop solar demand weakness. We view shares as fairly valued.

Enphase’s first-quarter revenue was at the midpoint of guidance, while gross margins achieved a new high-water mark of 45.7% (non-GAAP). However, the flat sequential revenue outlook is the key reason for share weakness, as a slowdown in the U.S. rooftop solar market— the company’s main market—affects growth. While sequential gross margin guidance remained healthy, we see an increased potential for price cuts to help spur demand and lower our medium-term gross margin assumptions accordingly.

A combination of policy changes in California (net energy metering 3.0) and higher interest rates are providing a difficult backdrop for U.S. rooftop solar demand in 2023. We reiterate our view for U.S. rooftop solar demand to be roughly flat in 2023 and 2024 due to these impacts.

Given our subdued outlook for U.S. demand growth, we reiterate our main takeaway from last quarter: international expansion and new products are increasingly key to driving top-line growth for Enphase. International growth (largely Europe) continues to execute well, with revenue increasing 252% year on year (accounting for 35% of total revenue) due to strong European demand and Enphase taking market share. Importantly, management commented European gross margins are in line with the U.S.—approximately 45%. This is a positive data point, in our view, as we had questioned whether the company could achieve a similar margin profile in a geography with a more competitive landscape.