FSLR - Enphase Vs. First Solar: One Is The Better Solar Buy As Electrification Story Stalls

2023-10-28 15:00:00 ET

Summary

• Mr. Market's pessimism surrounding multiple electrification stocks is highly palpable, attributed to the rising borrowing costs for mortgages and autos, triggering tightened discretionary spending.
• These headwinds have directly impacted ENPH's prospects, with the US/ EU reporting slowing retail demand and inventory correction through H1'24, if not longer.
• Then again, it appears that FSLR is somewhat immune, since it only serves utility scale solar operators, with its backlog extended through 2030 at favorable ASPs.
• Depending on how the stock market develops in the intermediate term, the recent correction observed in the FSLR stock may offer great opportunities for growth seeking investors.
• Inversely, based on its uncertain near-term prospects, we may see Market further downgrade the ENPH stock's valuations and prices, resulting in more volatility.

We previously covered First Solar (NASDAQ: FSLR ) and Enphase Energy (NASDAQ: ENPH ) in August 2023, discussing the former's double top/ bottom line beats as the latter reported a mixed performance in the FQ2'23 quarter.

While FSLR had reported growing backlog and expanding late-stage opportunities in the utility solar segment, ENPH had guided a slow down in the residential solar market in the US, implying that the latter might not be immune to the uncertain macroeconomic outlook after all.

We had rated the FSLR stock as a Hold while iterating a lower entry point for an improved margin of safety, while rating the ENPH stock as a Buy at $120s, which in hindsight had been poor judgement, as the latter continued to fall to double digits at the time of writing.

The last time that we had covered these two stocks together was in November 2022 here, discussing the dangers of their rich hyper-pandemic valuations while rating both stock as Hold (Neutral) then.

In this article, we will be discussing Mr. Market's pessimism surrounding multiple electrification/ solar stocks, attributed to the rising borrowing costs for mortgages and autos, with their prospects unlikely to lift in the near term and the demand destruction yet to bottom out.

While FSLR may have been rated as a Buy and ENPH as a Hold, we have also cautioned interested investors that there may be more volatility moving forward, since it is unknown if the former's bullish support at $150s may persist through the supposed " bear market rally ."

We shall discuss further.

The Electrification Investment Thesis May Have Temporarily Stalled

ENPH & FSLR 5Y Stock Price

For now, it appears that we are observing ENPH's (in red) and FSLR's (in blue) bust cycle after the hyper-pandemic boom, with their stock prices constantly recording lower highs and lower lows since the recent peaks in 2022 and 2023.

It appears that as the uncertain macroeconomic situation continues, their intermediate-term prospects are increasingly impacted, as more investors flee for safer investments, such as the US treasuries or Money Market Funds.

The elevated interest rate environment has also triggered sky-high borrowing rates for 30Y fixed mortgages at 7.79% (+0.48 points MoM/ +0.71 YoY) and new auto loans at 7.51% (+0.11 points MoM/ +2.35 YoY). This is compared to the 2019 averages of 3.8% and 4.63%, respectively.

The impact of the Fed's rate hike has been immense indeed, with less consumers upgrading homes and cars as discretionary spending are tightened. The same has been reported by Opendoor ( OPEN ), an iBuying company, with a " very tight housing supply" and multiple automakers preferring to moderate their EV production ramp-up.

These developments likely spell the end of ENPH's high growth trend, since the uncertain property market may reduce the demand for new renewable projects as more homeowners stay put, with the slowing EV adoption impacting the sales of its EV charging offerings.

As a result, it is unsurprising that most electrification stocks have similarly been affected, including ChargePoint ( CHPT ), with the latter currently trading at penny ranges.

ENPH's FQ3'23 Performance Suggests That The Pain May Last Through H1'24

For now, ENPH has already recorded an underwhelming FQ3'23 results with revenues of $551M (-22.5% QoQ/ -13% YoY) and EPS of $0.80 (-26.6% QoQ/ inline YoY), while guiding a drastically lower FQ4'23 revenue of $325M (-41% QoQ/ -55.1% YoY).

While we may usually term this phenomenon as a "kitchen sink quarter," we are no longer certain if the worst is already here, especially since demand has been notably slowing down both in the US and the EU , with things likely to get much worse before they get better.

For example, ENPH reported US revenues of $350.44M ( -16% QoQ / -22.4% YoY) and International revenues of $200.63M (-31.6% QoQ/ +9.6% YoY) by the latest quarter, with 3.9M microinverters (-24.8% QoQ /-9.3% YoY), 86.2 MWh of batteries (+4.7% QoQ/ -35.4% YoY), and 3.5K EV chargers ( -46.9% QoQ / -45% YoY ) shipped.

Based on the ongoing inventory correction worth $150M in FQ4'23 and under-shipping guidance through H1'24, we may see the stock further slide to retest lower support levels, despite the management's efforts to maintain its gross margins.

For now, ENPH's balance sheet remains healthy with a net cash position of $0.59B (inline QoQ/ +168.1% YoY) by FQ3'23. However, while the ENPH management may think that its current shares are cheap and therefore, repurchasing $110M of shares in the latest quarter, we believe that it may have been prudent to keep more liquidity at hand, attributed to the uncertain demand recovery.

FSLR Remains Somewhat Insulated From The Ongoing Carnage

On the other hand, while FSLR has yet to release its earnings, with the consensus estimating FQ3'23 revenues of $892.34M (+10% QoQ/ +41.88% YoY) and EPS of $2.04 (+10% QoQ/ +950% YoY), we are relatively confident about its prospects, since the solar company is in much better shape than ENPH.

This is attributed to a few reasons.

Firstly, FSLR reported fully sold out capacity through 2026 and growing order backlog at higher average ASPs through 2030, securing its top and bottom lines over the next few years of economic uncertainties.

Secondly, the solar company only sells its cadmium-telluride-based solar panels to utility operators, insulating it from the ongoing retail demand destruction, further demonstrating its intermediate-term advantage over ENPH.

Based on the newly announced bookings from Longroad Energy in early September 2023, we may also see FSLR's mid-to-late-stage opportunities of 70 GWs materialize in FQ3'23, effectively " locking up orders into 2030."

The fact remains that approximately 90% of its contracted backlog is structured as " firm purchase commitments ," effectively ensuring the solar company's outperformance over the next few years.

So, Which Solar Stock Is The Better Buy?

ENPH & FSLR Valuations

As a result of these market-wide pessimism, we believe that FSLR is a tempting buy after the much needed correction, with its FWD P/E valuation of 19.49x already moderated from its 5Y means of 23.06x and finally nearing the sector median of 20.36x.

Based on the FSLR management's FY2023 adj EPS guidance of $7.50 at the midpoint, it also appears that the stock is trading near its fair value of $146.17.

This number also nears our previous recommended accumulation range of between $140s and $160s, allowing interested investors to accumulate FSLR shares with a greater margin of safety.

Based on the consensus FY2025 adj EPS estimates of $21.38, there appears to be an excellent upside potential of +175.6% to our long-term price target of $416.69 as well.

On the other hand, while we believe that ENPH remains a long-term winner in the solar space, we may see more volatility in the near term, based on the stock's lower lows and lower highs since December 2022, with no floor in sight.

While ENPH may be trading near its fair value of $96.18, based on the consensus FY2023 adj EPS estimates of $4.92 and its FWD P/E valuation of 19.49x, we believe that the correction may not be over yet.

Based on its mixed prospects over the next three quarters, we may also see ENPH generate minimal growth, potentially causing Mr. Market to further downgrade its stock valuations and prices accordingly.

As a result of the factors discussed above, we prefer to rate the ENPH stock as a Hold (Neutral) here, while cautiously upgrading the FSLR stock as a Buy.

Naturally, the FSLR's Buy rating is not suitable for investors with lower risk tolerance due to the growing fear index , especially worsened by Powell's pessimistic commentary:

Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions.

Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy. ( CNBC )

With the Fed expecting a normalized economy only by 2026 , we may see the stock market remain volatile for a little longer, especially since it is unknown if the FSLR stock's bullish support at $150s may persist through the supposed " bear market rally ."

As a result, FSLR investors may want to size their portfolio according to their risk tolerance and dollar cost averages, while monitoring the company's performance closely.

For further details see: