I really hate to post about Earnings this week as I will need to talk about Enphase. The stock reported last week and has been getting crushed since then. This is an extension of an ongoing decline for the last 6 months. The decline over the last 6 months has flown in the face of the results posted by the company, but it has all come to roost at this point.
The Q3 numbers were not bad. Revenue was $102M up slightly from last year. The company continued its tradition of spending what it makes and Enphase was about break-even again. The slight Revenue Growth is the first issue. Enphase had been a growth story, particularly around the spectacular top line growth. But Q3 2015 was different, it was essentially flat with Q3 2014. If the growth has slowed, then people will not want to price the company very strongly. This is a problem with Growth Investing (also called Momentum Investing). Once the growth inevitably slows, then there is a dramatic stock drop.
But there is a second problem with the stock which was the projection of only around $65M of Revenue in Q4. This was noted because of extra inventory at Enphase’s distributors. This means that there was a slow down in Sales at the Distributors but they had already placed orders and those got filled before the slowdown was noticed. This is a bad sign for the future and will have to be watched. One other number that you can look at that makes me pause is the Accounts Receivable. This number was up $30M Year over Year, which means that Enphase might have shipped a significant amount of product at the end of the quarter. I don’t like these kinds of shifts as one can make some rather suspicious comments about managing Revenue to make it all happen in one bad quarter.
Then there is a third problem at Enphase. Price pressure has gotten too much and Enphase has lowered its Gross Margin forecast for the future. This is a drop of about 5% and looks to be a relatively long term drop. Because of this, Enphase has had a 7% layoff. This signifies to me that this is not a 1 quarter issue, but that the company is serious in changing its cost structure. This presents a problem in efficiency because Enphase will need to return to its former Revenue levels with 7% fewer employees. That can be a challenge, unless those were unproductive employees anyway. If they were, then one would question why they were still employed. This Gross Margin change is a great example of how to use the Way to Wealth Formula that I have been posting about. Because of this, I am extending my series on that one more week and I want to run through the consequences of these changes to a company.
Finally, there are the unstated uncertainties in the future. As many of you may be aware the vast bulk of the Tax Credits for Solar from the US Federal Government expire next year. This will put further price pressure into the market. On top of that, Oil Prices have dropped significantly over the past year. This also looks to be a long term trend. These two taken together mean that Energy Prices are likely to decline. This means the Return On Investment (ROI) for a Solar Installation will be tougher for people to make.
So, we will have to see if Enphase’s expansion Internationally and into the Storage Business will help. Right now the Market Cap of Enphase is under $100M. This means it is about 1/4th of Sales. Management will be under extreme pressure to change this.
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