Enphase Energy (NASDAQ: ENPH) rises on fraud allegations. Sounds strange, right? The promising energy stock is turning heads in the investment world. Because their impressive 9540% share price growth could be entirely based on fabricated revenue figures. So let’s get to the bottom of this investment dilemma.
Table of contents 1. Why is ENPH up? 2. ENPH's remarkable growth story. 3. Should you short or invest in ENPH?
Why did ENPH rise on fraud allegations?
The bulls were rallying behind ENPH, like most companies, over the past three months. However, once ENPH surpassed its pre-COVID level, the solar energy company began to experience investors backing.
However, in recent weeks the bears have come out of the woods. It all started when “Block & Leviton LLP, filed a class-action lawsuit on behalf of the shareholders against Enphase Energy.”
The deadline for the lawsuit is August 17th, 2020. Thus, investors should expect some finality as the court hearing approaches.
The number of short-sellers began to increase by the day, as fraud allegations sent investor confidence downhill. However, the short seller leading the bears through the jungle is Prescience Point Capital Management (PPCM). PPCM released a report explaining how ENPH “fabricated up to 39%” the companies revenue in past financial statements. Also, members of Enphase management have sold approximately $US121 million ENPH shares ever since June. Not only creating alarms bells for investors but also adding weight to PPCM’s short-selling argument.
Furthermore, PPCM urged Deloitte to conduct a thorough audit of the ENPH’s accounting practices, with the intention of delisting the company. Overall the lawsuit, coupled with PPCM’s negative comments creates a gloomy future for ENPH.
Enphase without the legal spotlight
If we remove the legal microscope, investors are left with a high flying solar energy company. Enphase’s growth over the past few financial years is outstanding. Gross profit, revenue, and operating income are all up 142%, 105%, and 526% in the past year. Not to mention that ENPH managed to transform an operating loss of $39 million (2017) into an operating profit of $102 million in 2019.
Thus explaining why ENPH’s stock priced soared by 9,540% within three years. However, the image of a meteoric rise instantly fades if fraud allegations amount to be true.
Is the ENPH stock worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Short answer: If the lawsuit crumbles, there could be potential.
If investors are scratching their heads as to why an Energy company branded with fraud allegations rose 16% at the bell, you are not alone. To add insult to injury, investors are picking camps. One side we have short-sellers who are adamant that the fraud allegations are true. On the other side, you have investors snapping up shares while everyone panics. The split in investor morale adds to the confusion. Let’s go through the two strategies.
In light of the lawsuit and PPCM’s allegations, it can be luring to short ENPH. If you are looking to invest in ENPH put options, I would suggest you ask yourself one question. Is there enough evidence pointing towards a legal conviction, or is there doubt? The likely legal outcome will become clearer with time.
However, investors must understand hat PPCM have an incentive for the stock to be bearish. The last thing you want is ENPH, successfully refuting the allegations. Because then the likelihood of your put option being filled is low, and you have to service your premiums. Thus, if you take the shorting route understood the upside and downside.
Investing for the long-term
It seems some investors saw the lawsuit scares and decided to grab even more shares. Some investors see Enphase’s growth to continue into future, with the legal spotlight representing a mere speed bump. Hence why the ENPH stock opened 18% higher today. Investing for the long-term, and picking up discounts along the way is a smart strategy. We saw he same thing happen when Westpac got hit with a money laundering lawsuit earlier this year.
However, if the lawsuit results in ENPH being permananetly branded with fraud corruption, then the so called discounted shares will plummet in value.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Patrick McLoughlin, Senior Manager of YIG.