Prescience Point claims that "at least 39%, or $205.3 million, of ENPH's reported U.S. revenue is fabricated"
After sliding 26% on Wednesday after Prescience Point issued a negative research report on the stock, shares of Enphase Energy (ENPH) have since recovered most of the losses as analysts called the selloff "overdone" and argued that the underperformance provides a "compelling" buying opportunity.
FINANCIAL REPORTS 'NOT RELIABLE': Prescience Point Capital Management published a negative research report supporting its short position in shares of Enphase Energy. "Prescience Point has been closely scrutinizing Enphase for over two years and we believe the company's financial performance has become increasingly disconnected from reality since our initial reports were published in July 2018 and August 2018," Prescience said. "Following our latest investigation, which included interviews of numerous former employees, we believe that Enphase's financial reports are not reliable, and that the 4,653% increase in its share price since CEO Badri Kothandaraman was promoted to CEO is unwarranted," the report reads.
"The explosive growth that Enphase has reported to investors over the last two years is nothing but a sham which has lined the pockets of those at the top of the company," said Eiad Asbahi, Founder and Portfolio Manager of Prescience Point. "We believe the evidence presented in our report will result in multiple government investigations, a major accounting restatement, shareholder lawsuits and a delisting of ENPH shares from the NASDAQ." "Our research suggests that at least 39%, or $205 million, of US revenue reported by the company is potentially fabricated, as is a significant portion of the company's international revenue. Multiple former employees in India independently told our private investigators that Enphase was fabricating figures it reports publicly, and that the company is using overseas operations to help executives perpetrate potential accounting violations.”
"Our research also suggests that Enphase executives and board members, as well as its previous largest shareholder, likely learned of the existence of our private investigation. This is supported by the unprecedented number of shares these parties sold from late-May to mid-June, which is right around the time that our private investigation had wrapped up. Their timing and shear magnitude of sales appears to be a rush for the exits ahead of Enphase's coming downfall."
SELLOFF OVERDONE: In a research note to investors following Prescience's report, Johnson Rice analyst Martin Malloy upgraded Enphase Energy to Buy from Accumulate with an unchanged price target of $68. The analyst believes the selloff on Wednesday based on the short report was overdone, arguing that investors should to focus on the company's operating cash flow generation, its new product pipeline and its path toward international growth. He expects continued strong growth for Enphase as the company adds products and services expands geographically.
JPMorgan analyst Mark Strouse also told investors that he views the selloff in shares of Enphase Energy as overdone. The analyst pointed out that Enphase has seen a rebound in demand in the U.S. each month since April, and trends in Europe are faring even better relatively. Further, he noted that the company has stated that it is not stuffing channels with inventory and that unit shipments have exceeded unit installations owing to channel expansion as well as replenishment of inventory. While presenting yesterday at the J.P. Morgan Energy, Power & Renewables Conference, the company's co-founder and Chief Products Officer, Raghu Belur, seemed "dismissive" regarding concerns expressed in the short report, added the analyst. Strouse has an Overweight rating on Enphase Energy.
BUYING OPPORTUNITY: Also bullish on Enphase Energy, Roth Capital analyst Philip Shen said he views the selloff in the shares following Prescience Point's short report as a buying opportunity, and reiterated a Buy rating on the stock with a $60 price target. As was the case in 2018, Prescience Point's "claims are specious - some are illogical, some are nonsensical, and we believe a lot is circumstantial," Shen contended. The analyst argued that the clearest evidence that the short report is unfounded resides in Enphase's financials. Shen noted that the company generated $180M cash flow since the start of 2019 with a corresponding increase in cash on the balance sheet. "We don't see how this amount of cash generation could be accomplished by overstating revenues and margins," the analyst added.
Meanwhile, Cowen analyst Jeffrey Osborne told investors in a research note of his own that the 26% selloff Wednesday in shares of Enphase Energy following Prescience Point's report creates a "compelling" buying opportunity. The analyst argued that there are a "number of inaccuracies" in the report, as he sees Enphase's fundamentals as "solid," the product cycle working to drive down cost, and the industry accelerating post COVID-19 delays. Osborne also noted that cash generation from operations excluding debt issued from Enphase aligns with its revenue growth. This would likely not be seen with "fabricated" revenue, Osborne contended. He has an Outperform rating and a $52.50 price target on the shares.
PRICE ACTION: In morning trading, shares of Enphase Energy have gained almost 18% to $46.06.