Enphase Energy (NASDAQ:ENPH) underperformed in Q4 as expected and the company admitted in the ensuing conference call that there was a substantial "going concern" doubt at the end of the quarter. The Company acted quickly during the current quarter to bring in additional capital to rectify the problem.
For reference, during the quarter, the Company offered a secondary, did an ATM offering, made a private placement, and restructured debt. The Company also conducted an extensive restructuring to bring down the break-even revenue. The result of these moves is that the Company is on a significantly stronger footing now and management hopes to return to profitability in the second half of the year, if not sooner.
Unfortunately, as has become the norm, we find it difficult to accept management commentary since it continues to be out of touch, or misleading, with the market realities. The management also consistently misses taking steps that may be necessary to revitalize the Company.
First, we will discuss the positives in the Company's narrative and then go on to address the shortcomings.
- Fortunately, the Company could raise enough capital throughout the last several quarters to stay in business and to get to the next generation IQ6 product which the Company expects to ship imminently. IQ6 is certainly the product that the Company badly needs and indications so far are positive.
- The Company seems committed to a rapid ramp of IQ6 and is promising that the ramp will be aggressive in Q2, that Q3 will be mostly IQ6, and Q4 will be pretty much all IQ6. However, as we will discuss later, it is to be seen if the Company can deliver on this ramp.
- The Company also claims to be on track to introduce the much-needed IQ6 AC module product line with JinkoSolar (NYSE:JKS), SolarWorld, and LG. These AC modules are expected to start becoming available from late Q2. Unlike the last go around when the Company launched an AC module product line, the chances of success for this product line appear bright.
- The Company's following generation product, IQ7, is slated for release in Q1 2018.
- The market is moving more rapidly to higher wattage panels which can help Enphase sell higher wattage inverters and make more revenue per attachment. This trend can somewhat help offset ASP declines.
- The market is also moving away from larger players like Tesla (NASDAQ:TSLA)/SolarCity, Sunrun (NASDAQ:RUN), and Vivint Solar (NYSE:VSLR), which is likely a net positive for Enphase compared to SolarEdge (NASDAQ:SEDG)
- And finally, there is very little doubt that the Company now has a lower break-even point and has a longer runway.
- We continue to believe that the Company's strategy of continuing with its AC Battery product is deeply flawed. Barring a strategic reset, we do not see a path to success for this product line.
- After a couple of quarters of hyping the AC Battery product line and talking up a storm about large demand for the product, the Company refuses to break down the revenue or profitability for this product line. It is quite telling that, even with the addition of this supposedly successful product line, the Company is forecasting Q1 2017 revenues to be BELOW the Q1 2016 level when Q1 2016 itself was considered an especially soft quarter.
- The Company continues to be doing a terrible job in its core microinverter market. The soft guidance for Q1 indicates that, even if the battery sales are close to nothing, the Company is underperforming in the market.
- Management claimed that the California residential market could be off by as much as 50% in Q1 due to heavy rains and presented rain as the reason for the soft revenue guidance. However, this commentary stretches credibility as rains certainly do not account for a 50% drop-off in Q1 shipments. Although rains played a part, we believe it is far more likely that the softness is driven by the phase-in of NEM 2 in California's large PG&E territory.
- SunPower (NASDAQ:SPWR) has been ramping its AC module technology throughout 2016 and now seems to have gained about 12% inverter market share - almost all of this likely came at the expense of Enphase. SunPower continues to ramp this product at Enphase's expense and Enphase will not have much of a response until its AC module products become available from its partners in Q2 or may be Q3. In the meantime, SunPower could take significant additional market share.
- If our view is valid, then by misunderstanding or misstating the reason for the market softness, the Company is likely yet again setting itself up for a soft Q2.
- While the management denied any channel inventory buildup, we suspect that the channel inventory in Q1 will be higher than usual due to the soft Q1. This also implies that IQ6 ramp may take longer than expected as the channel needs to be cleared of the older product.
- While AC modules may be a positive development for the Company, it is unclear if the Company can make up for the lower ASP of the sales into these modules with offsetting savings on SG&A. If not, then the AC module sales may act to reduce the Company's revenues and margins.
- Enphase's primary competitor, SolarEdge, is planning about a 10 to 15% ASP reduction in 2017 which means that Enphase IQ6 margins will likely be much worse than what the management may be anticipating. Depending on the timing, the impact of these ASP reductions could be particularly harsher in the transitional Q2 and Q3 quarters.
All things considered, the future continues to look quite bleak for Enphase. The Company's story is now going to be driven by the hopium of IQ6. While the management appears to be out of touch, hopium, similar to what we see with the Model 3 for Tesla, may provide a high level of unjustified support for the stock.
Our View: Avoid
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Disclosure: I am/we are long SEDG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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