Last week was brutal for U.S. stocks, as the S&P 500 Index ($SPX) tumbled into correction territory after having fallen over 10% from its 2023 highs. Things were particularly bleak for solar companies, and Enphase Energy (ENPH) stock fell to three-year lows.

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 the U.S. President, as he vowed to overturn his predecessor’s friendly policy towards fossil fuels. However, green energy stocks have looked weak over the last couple of years.

While the broader markets are still in the green for 2023, the Invesco Solar ETF (TAN) is down about 40% for the year – reflecting the pain that solar companies are going through. Enphase stock in particular is now down 72% year-to-date, and is trading around its lowest levels since October 2020. 

In this article, we’ll analyze why Enphase stock is falling, and whether it can recover and go back in the long term.

Why Is Enphase Stock Falling?

The most recent trigger for the collapse in Enphase stock was its Q3 earnings report. The company’s sales fell 13% YoY in the quarter, and trailed analysts' estimates. Its U.S. revenues fell 16% compared to Q2, which it blamed on higher interest rates and California’s so-called Net-Metering 3.0 (NEM 3.0) rules - which provide lesser credits to solar homeowners for the excess electricity that they sell to the grid.

The company’s Europe revenues fell even more steeply, and were 34% lower sequentially. The company attributed this to higher inventory in the region, coupled with weak demand in key markets like Germany, France, and the Netherlands.

Enphase’s commentary on the Q4 outlook was also dismal, as the company forecast revenues between $300 million-$350 million – well short of the $577 million that analysts expected. The guidance assumes a $150 million channel inventory reduction in the quarter. The company expects channel inventories to fall in the next two quarters before normalizing in Q2 2024. The fall in channel inventories would mean that Enphase’s shipments would be lower than the end demand over the period.

Solar Stocks Have Fallen in 2023

Days before Enphase’s warning on the tough macro environment taking a toll on sales, SolarEdge (SEDG)had issued a similar profit warning, which triggered industry-wide selling across solar stocks – including Enphase. Solar stocks have had a horrid run in 2023 amid an unfavorable macro environment, higher interest rates, and a price war – something which we are also witnessing in the electric vehicle (EV) industry, where market leader Tesla (TSLA) has embarked on an aggressive price war  – pressuring not only its own profit margins, but also those of other industry players.

Enphase Stock Forecast

After Enphase released its Q3 earnings, several brokerages - including HSBC, Oppenheimer, and Piper Sandler - downgraded the stock, while some others drastically lowered the target price.

Overall, ENPH has a Moderate Buy rating on Wall Street. Among the 29 analysts covering the stock, 13 rate it as a Strong Buy and 3 as a Buy. Twelve analysts rate it as a Hold, and 1 as a Moderate Sell.

Should You Buy the Dip in ENPH?

Enphase stock looks like a buy if you are willing to be patient and hold the stock for the long term, without getting too perturbed by the short-term price volatility. Here’s why.

1. Inventory Stabilization.

As the supply chain inventory stabilizes, Enphase’s sales should pick up in the back half of 2024. Inventory stabilization would also support the industry pricing environment.

2. Transition to NEM 3.0.

Enphase installers are also transitioning to NEM 3.0, but it will take a “few more quarters,” as per the company. Management estimates that with the proposed hike in utility rates, the payback period for a NEM 3.0 solar plus a battery system will be similar to a NEM 2.0 solar-only system.

3. Expansion into New Geographies.

Enphase continues to expand into new geographies, which should support its growth over the long term. It has also come out with a connected EV charger, which will help it further increase its target market.  

4. Focus on Innovation.

Innovation is another competitive strength of Enphase, and the company is working on IQ9 and IQ10 microinventors, as well as 2 new generations of batteries.

In terms of valuation, ENPH trades at a next-12 months price-to-earnings multiple of 23x. The multiples are below historical averages, but should be seen in context, as analysts expect the company’s revenues to fall 0.6% YoY in 2024. 

I believe that while Enphase stock could be under pressure for some more time to come, especially with the global macro environment worsening amid the Israel-Hamas war, it should eventually recover.

With growth expected to rebound in the second half of 2024, I believe ENPH stock should have a much better run in 2024 as compared to 2023. Also, solar and green energy stocks should be among the biggest beneficiaries of cuts in interest rates, which look quite likely next year.