What's Up With Enphase?

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What's happening at Enphase

On June 17th the stock of Enphase was getting sold off hard by investors who caught wind of a short sellers letter in which the author, Eiad Asbahi, Founder and Portfolio Manager of Prescience Point Capital, made numerous negative claims about Enphase. I don't mind short-sellers, they bring price discovery to stocks. In fact without short-sellers a stock will just run up to absurd levels unchecked; think back to Bitcoin before derivative markets were available. What I dislike are short-sellers who make outlandish claims and don't back them up with specific, detailed evidence of wrong doing.

My initial reaction was to dismiss the letter, but after a 26% sell-off in the stock I decided to add at those lower levels and put out a notice to all my readers. My response was quick and at a high-level that maybe wasn't completely helpful to my readers. The following day the stock was up 18% and gained another 2% today; though the stock is still more than 17% below its June 16th high.

Another Perspective

Today I'd like to introduce EnerTuition and their blog Beyond The Hype.

Beyond The Hype https://www.patreon.com/BeyondTheHype

EnerTuition can also be found on seeking alpha.com, you can follow them here:

https://seekingalpha.com/author/enertuition/instablogs. Beyond The Hype is an emerging company technology stock analysis service. Currently, they focus on identifying and investing in renewable energy, storage, EV, autonomous vehicle, CPU, and GPU markets. Please note that both the Stay Invested blog and EnerTuition are long Enphase stock.

Q: What are the key points to consider in the Prescience Point Capital letter?

A: EnerTuition

  • Enphase stock was battered by a note from short seller Prescience Point about alleged fraud. We show the weakness of the analysis.

  • The Prescience Point note is deeply misguided and we show demonstrably that the authors have poor understanding of the MLPE business.

  • We believe it is best for investors to ignore the Prescience Point note.

  • In response to Prescience Point note, Beyond The Hype called for ENPH a buy yesterday with the stock trading around $38.

Q: Can you describe what happened to Enphase stock from your perspective?

A: Sure

Enphase Energy (ENPH) had a rough day on Tuesday with the stock dropping 26% after news of significant insider sales and a coincident negative report from short seller Prescience Point ("Prescience") alleging fraudulent financials and other problems at the Company.

Prescience is not new to Enphase stock. This firm has alleged similar wrong doings at Enphase in 2018. Management did not respond to the short seller’s claim immediately then but, on July 31, 2018, during the Company’s Q2 earnings call,

management harshly put down the short seller’s claims. CEO Badri Kothandaraman’s response at that time was:

“Last week we were attacked by a short seller who accused us of fudging the books. We did not respond, but to be honest this news aggravated and enraged us as the remarks were baseless and wrong. I want to say a few worlds on our core values as a company. We hold ourselves to the highest standards of ethics and integrity. We tell the truth and don’t tolerate excuses and the only thing we value is data, logic and reason.

Last year McKenzie came in taught us how to work on costs. This literally involved working on hundreds of little things to improve the company. Just to show you every cent we take out of cost is important. A few extreme examples to show the extent of how we think and manage our, yes, for example we've spent a lot of time optimizing the labels and manuals on the microinverter to save pennies.

We've spent tons of time in minimizing and squeezing every square millimeter of PCB space for the microinverters. We spent a lot of time eliminating components such as resistors and capacitors even if it means a fraction of a cent at a time. I am proud to have an incredible group of people who have worked very hard and turned this company around. We are laser focused on our number one priority, improve profitability quarter-on-quarter and creating further shareholder value.”

Subsequently, the company’s continued to grow rapidly and the stock has since moved from the $20s to $60s. Given the background, and having not successfully proved its past claims, it is interesting to see Prescience Point come back with yet another set of claims against Enphase.

Q: What specifically was wrong with their short thesis?

A: Their premise is just wrong

The previous short thesis was wrong and now the current short effort seems to be deeply flawed as well, and based on innuendo and a lack of knowledge about the Enphase business. The report tees-off on a very weak premise:

“A breakthrough in our research of ENPH occurred in late 2019 when we were told by a former ENPH employee that the Company had, peculiarly, offshored many of its key finance and accounting (“F&A”) functions to its India-based office in late 2018. As past accounting scandals have shown, offshore entities can and have been used as a tool to help companies perpetrate fraud. Given this, and our previous reservations about ENPH’s accounting practices, we viewed this as a significant red flag that warranted further investigation.”

While fraud could be a possibility, a simple explanation for using India based teams was repeatedly communicated by management: cost cutting. If Prescience can misread such a simple business decision, it is no wonder that it struggles to understand how a company can cut costs as deeply as Enphase has:

“The logic-defying decrease in ENPH’s reported unit costs is fiction, in our view”

Based on a flimsy premise, Prescience proceeded to probe using a third-party investigation firm in India. Prescience’s narrative about the entire subject gets quite dubious with much innuendo about alleged Enphase fraud from ex-Enphase employees and ex-distributors. Then the report moves on, using half-baked assumptions to make a case that Enphase numbers are not trustworthy.

Q: Can you give some examples?

A: Sure

Let's consider one of the key claims. Prescience, like it did in 2018, claims that it cannot believe the cost gains that Enphase made are possible. While we agree that the cost savings have been spectacular and we too were surprised by them, we do not see them indicating fraud. Note that Badri has directly addressed this issue in the Q2 2018 conference call as shown in the quote above. Badri was first and foremost an operational leader who was brought in to clean