One of the ugliest stocks earlier this year, solar energy specialist Enphase Energy (NASDAQ:ENPH) suffered heavily from an unfavorable environment. In large part, elevated borrowing costs dragged down Enphase and its peers as the increased burden impacted both the business side and the end consumer. However, a possible pivot in monetary policy dramatically improved sentiment. I am bullish on ENPH stock due to the potential game-changing development.
ENPH Stock Gets a Much-Needed Reprieve
To understand the lifeline that the Federal Reserve may provide ENPH stock and its shareholders, we only need to go back a few weeks. That was when Enphase – a provider of microinverter-based solar and battery systems – disclosed its third-quarter earnings report. It wasn’t pretty, thus demonstrating the reprieve that the central bank just might offer the embattled enterprise.
As TipRanks reporter Kailas Salunkhe mentioned, Enphase incurred a heavy revenue blow, printing $551.1 million. In the prior sequential quarter, the company managed to ring up $711.1 million in sales. Just as problematic, Enphase’s earnings per share fell to $0.80 from $1.09. As Salunkhe pointed out, that was despite an improvement in its gross margin.
Unfortunately, the pain didn’t stop there. Due to headwinds in the economy, the solar specialist’s U.S. revenue plunged by 16%. Moreover, revenue in Europe cratered by 34%, in large part due to high inventory levels at its distribution partners. Subsequently, Bank of America’s (NYSE:BAC) Julien Smith saw enough, maintaining a Sell rating on ENPH stock while lowering the price target to $65 from $76.
However, if the Fed goes through with interest rate cuts, the paradigm could potentially shift – and shift favorably. Per TipRanks contributor Steve Anderson, policymakers may be considering three rate cuts to take place throughout 2024. To be clear, that’s not set in stone because the Fed could change its mind depending on economic conditions.
Still, circumstances, so far, look on course for reduced borrowing costs. If so, that would be a huge benefit for ENPH stock. On the solar supplier side, enterprises like Enphase have racked up debt to expand their businesses. Obviously, on the consumer side (residential and commercial), high interest rates crimp financing capabilities.
Rate Cuts Represent a Holistic Benefit
Of course, monetary policy is a complex and dynamic issue so you can’t make guaranteed projections. On paper, though, lower interest rates should be a win-win for the solar industry value chain. Again, both producers and consumers may benefit from the increased accessibility that reduced borrowing costs bring. However, I would argue that a monetary policy pivot represents a holistic benefit.
For one thing, lower interest rates – all other things being equal – spur business activity. Fundamentally, that’s because the cost of borrowing decreases, which supports inflation (gradual currency devaluation). Under that scenario, it doesn’t make much sense for businesses to hold cash. Basically, in an inflationary ecosystem, money today is worth more than the (same denomination) money tomorrow.
Put another way, companies have a clear incentive to invest their money to beat the erosion of inflation. Generally, that translates to business expansion, which means boosted hiring (hopefully for high-paying jobs). In turn, ENPH stock should benefit down the road from an expanded total addressable market.
Second, lower rates offer an upside catalyst for Enphase and its peers. According to the U.S. Environmental Protection Agency (EPA), in 2021, “fossil fuels remained the most common fuel type for electricity production in the U.S. The primary fuel type was natural gas, accounting for about 38.4% of total energy production nationwide.”
Should the Fed implement interest rate cuts, the inflationary impact should lift energy resource prices. If so, this framework should incentivize consumers to consider the cost-saving benefits of solar power.
Financial Considerations and Risk Factors
At the moment, ENPH stock trades at trailing-year earnings multiple of 31.2x. At first glance, that doesn’t sound appealing. After all, the solar sector’s price-earnings ratio sits at 21.35x. Still, it should be mentioned that Enphase’s multiple is far lower than what it was a year ago. With investors assuming that ENPH faces a dour environment, it has been significantly derisked.
Obviously, it’s only a bargain if monetary policy pivots toward rate cuts. However, that’s a risk that prospective investors must consider carefully. For example, the November jobs report came in hotter than expected. A rate cut probably isn’t appropriate so long as the job market continues to rise above expectations.
Is ENPH Stock a Buy, According to Analysts?
Turning to Wall Street, ENPH stock has a Moderate Buy consensus rating based on 15 Buys, 12 Holds, and one Sell rating. The average ENPH stock price target is $114.46, implying 7.6% downside risk.
The Takeaway: ENPH Stock May Get a Second Chance
Enphase Energy, battered by high borrowing costs, sees potential salvation in a Fed pivot to rate cuts. While Q3 earnings were rough, lower rates could boost both Enphase’s business and consumer demand through cheaper loans, stimulating economic activity and, ironically, raising energy prices, pushing consumers toward solar-based cost savings. For speculators, ENPH stock is worth a look.
