Enphase Energy: BMO Calls For Margin Improvement On Increase Microinverter Sales

BMO Capital Markets’ recently hosted Enphase Energy’s (Nasdaq: ENPH) Head of Investor Relations, Karen Sagot and VP of Corporate Development Adam Hinckley, for an investor dinner. The analysts said that their main takeaway from the dinner was that they are “incrementally more confident that ENPH has multiple ways to continue to maintain and drive gross margins higher.”

They add that Enphase continues to be “one of the best positioned companies across the entire Energy Transition sector,” and a high-quality name for investors to get exposure to residential solar generation. As a result, they reiterated their outperform rating and $318 12-month price target on the stock.

Enphase currently has 31 analysts covering the stock with an average 12-month price target of $284.48, in line with the current stock price. Out of the 31 analysts, six have strong buy ratings, 17 have buy ratings, and the last eight analysts have hold ratings on the stock. The street high price target sits at $363, which represents an upside of about 27%.

A key takeaway BMO was left with after the dinner is that Enphase continues to execute “better than almost everyone in the solar sector,” and believes that this will translate into higher gross margins over the coming quarters.

BMO previously noted that part of Enphase’s expanding gross margins comes from the expansion of selling their IQ8 microinverters in the United States, which has a higher average selling price. They add that the company noted that 37% of its revenues came from IQ8 microinverters, and with energy reliability in Europe at the forefront of everyone’s mind, they expect the IQ8 microinverters to see strong sell-through.

Management says that Europe will be a key driver to attain higher margins and believes that a key competitive advantage the company has is that installers will be hesitant to switch back to legacy string inverter providers “given the better installation efficiency, reliability, and functionality of ENPH’s microinverter device.”

Enphase said that they believe the 42.2% gross margins attained in the second quarter of this year can be improved. Management believes it can attain higher gross margins via improvements to the design and efficiency of its microinverter product, as they expect future versions to require fewer components.

Management also said they view their current long-term 35% gross margin target “increasingly as a floor rather than indicative of an equilibrium level.”

Another thing management noted during the dinner is that they are still evaluating ways to take advantage of the tax credit for inverter manufacturers and say that they are still committed “to its capital-light model whereby it relies on contract manufacturing.”

Lastly, BMO says that Enphase’s equity valuation “didn’t factor into our meeting with ENPH,” and says that the stock is not as expensive as some believe. This is primarily due to BMO’s expectations of growth and sources of additional growth from the IRA and Europe, which are not baked into their estimates.

Information for this briefing was found via Edgar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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