Cash-strapped microinverter producer Enphase Energy (NASDAQ:ENPH) shares have been soaring in Tuesday’s pre-market session and are currently up by roughly 20% as of the time of this writing thanks to news of the company having signed a license agreement with electronics manufacturing services giant Flextronics (NASDAQ:FLEX):
On June 13, 2017, Enphase Energy, Inc. ("Enphase") entered into a Master License Agreement ("Agreement") with Flextronics Industrial, Ltd. ("Flextronics"), under which Enphase licenses its intellectual property to Flextronics in order to allow Flextronics to market, manufacture, and sell certain Enphase products. Such rights may be used to assure continuity of supply to Enphase customers.
The above description of the Agreement is not complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which will be filed as an exhibit to Enphase’s Quarterly Report on Form 10-Q for the period ending June 30, 2017.
Picture: Enphase S820 and IQ6+ Microinverters
Moreover, Deutsche Bank is out with an upgrade on the stock from "sell" to "hold" this morning as yesterday’s analyst day obviously went quite well.
That said, investors chasing the stock here are most likely getting the news wrong. While the company has not filed the complete agreement with the SEC yet, I do not expect this transaction to result in material cash inflows for Enphase.
Readers should note that Flextronics has already been Enphase’s microinverter manufacturing partner for eight years now, so this is not a new relationship.
Judging by the statement that "such rights may be used to assure continuity of supply to Enphase customers" actually points to Enphase further streamlining its self-marketed product portfolio by transferring the marketing and selling rights of some older or non-core product lines to Flextronics, which has already manufactured these products for years for Enphase. The transaction will most likely help Enphase to bring down operating expenses and working capital requirements.
In fact, the company alluded to all of these aspects in today’s analyst day presentation.
Given the assumed character of the agreement, I would actually be surprised to see a cash payment from Flextronics to Enphase here.
There’s more evidence for my take on the transaction as the company does not disclose any numbers and has not even issued a press release so far.
In short, Enphase is suffering from fierce competition and has been severely pressured by liquidity issues as of late. Despite raising tens of millions in new capital during Q1 and ongoing efforts to bring down its expense structure, the company is still expected to burn meaningful amounts of cash going forward which might very well require just another capital raise in the second half of this year.
There’s plenty of up-to-date coverage on Enphase available on Seeking Alpha, investors looking for more color on the company should start with the articles from fellow contributors Morningsidepark and EnerTuition.
While the stock price has already decreased more than 50% from 2017 peak levels, there might be more downside ahead, particularly if the company once again fails to meet financial targets going forward like it has already been the case several times in the recent past.
Sell the news. Enphase is most likely disposing of some older and non-core product lines in a move to bring down operating expenses and working capital requirements as also stated in today’s analyst day presentation. Accordingly, I do not expect Flextronics to pay a meaningful license fee.
The violent pre-market move provides investors with a decent opportunity to finally dispose of the company’s shares or even outright short the stock.
While momentum traders will undoubtedly try to get behind the stock this morning, I fully expect their attempts to ultimately fail and the share price to come back meaningfully over the course of the session despite the Deutsche Bank upgrade most likely providing some additional tailwinds.
Personally, I am looking forward to the momentum crowd trying to move the stock big time this morning and initiate a short position once price action and trading volume are starting to weaken.
As always, don’t bet the farm on short positions and adequately manage your risk.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in ENPH over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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