In a textbook case of investors getting carried away on a good story, the stock of solar energy solutions Enphase Energy reached an all-time high of $340 in late-2022. At that price, the shares were trading at a P/FCF ratio of 70 as if the high sales growth rates would last forever. But energy, solar or not, is a cyclical business, which goes from boom to bust in predictable fashion.
The initial supply deficit leads to high growth and big profits for the few players in the industry. This, in turn, attracts more competition, whose supply eliminates the initial deficit and eventually creates a glut, destroying the high growth and big profits, which attracted it in the first place. When the new competition comes from a country known as the world’s factory, things can deteriorate very quickly.
That’s precisely what happened in 2024 after China decided it wants some of solar’s fat profit margins. It flooded the market with so many solar panels that people started using them as cheap garden fencing instead. As a result, the entire industry suffered a painful downturn.
Sales at Enphase Energy crashed 42% in 2024. Free cash flow, however, fell by just 18%, which speaks for responsible cost management and resiliency during a crisis. This is what brought Enphase Energy to our attention as the stock is down more than 80% from its 2022 record.
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From an Elliott Wave perspective, the linear chart above is not very useful. That’s because investor enthusiasm between 2020 and 2022 was so strong that it made everything prior to it look almost invisibly small. For instance, Enphase Energy plunged 64% during the Covid crash of March, 2020, but it looks like nothing more than a blip here.
True, we can recognize an a-b-c running flat correction, followed by an impulse, marked 1-2-3-4-5. But the big picture context in which these patterns fit is missing on this chart. To get a clearer view, we need to switch to logarithmic scale, which makes a 10% move in 2018 look just as big as a 10% move in 2022. It fixes the distortion created by the post-Covid exponential price growth.
And the logarithmic chart shows that the running flat correction fits into the position of wave (4) within a bigger impulse pattern, market (1)-(2)-(3)-(4)-(5). The five waves we saw on the linear chart are therefore labeled as wave (5) and the five sub-waves of wave (1) are also visible. The 64% Covid crash is marked as wave (2).
Every impulse is followed by a three-wave correction and that’s precisely what the post-2022 bear market stands for. If this count is correct, Enphase Energy stock could be searching for a bottom already. The P/FCF ratio has also come down to a much more reasonable 18. That being said, the situation in the solar industry remains very challenging. With more cash than debt on its balance sheet, the company should be able to continue weathering the storm, but the stock can keep sliding in the short-to-mid-term. We’ll be keeping an eye on it, and the underlying fundamentals, for signs of improvement.
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