Is Shoals Technologies Stock a Good Solar Stock to Own?

Broadly talking, tech shares are risky. That has been doubly true with photo voltaic shares, which are inclined to rise and fall in tandem fairly than based mostly on particular person firm efficiency. There’s some justification to lumping photo voltaic firms collectively on this approach, as a result of they’re typically topic to most of the identical dangers whereas additionally reaping most of the identical advantages via subsidies. Certainly, we’re presupposed to be residing within the golden age of inexperienced expertise with initiatives just like the U.S. Inflation Discount Act (IRA) and European Inexperienced Deal providing billions of {dollars} in tax credit, loans, and grants. As an alternative, photo voltaic shares are down almost 30% in 2023 based mostly on the year-to-date efficiency of the Invesco Photo voltaic ETF (TAN), a pure-play photo voltaic fund.

Why are photo voltaic shares lagging? A few of it’s attributable to particular person performances. The three high holdings in TAN – Enphase Vitality (ENPH), First Photo voltaic (FSLR), and SolarEdge (SEDG) – account for roughly 30% of the fund’s holding. Huge swings in any of those shares will definitely drag down the remainder. In reality, each Enphase and SolarEdge are down greater than 50% this 12 months, following their final quarterly earnings stories in August. Analysts apparently didn’t like a number of the underlying metrics round income and earnings for each firms. 

On this case, we’re not within the particulars across the macroeconomic headwinds every firm is dealing with. As we stated, photo voltaic shares are extremely risky, and rising rates of interest are making it dearer to finance massive renewable vitality tasks. As readers could recall, SolarEdge makes most of its inexperienced in greentech from photo voltaic inverters, a key piece of photo voltaic expertise infrastructure. It might not sound horny, however the firm recorded Q2-2023 revenues of near $1 billion – extra money than it made in all of 2018 and a 36% bounce in quarterly from this time final 12 months. Regardless of the down 12 months, SolarEdge inventory continues to be up by greater than +2,350% during the last 5 years, and now sports activities a really engaging easy valuation ratio (market cap/annualized income) of lower than 2.

Purchase on the dip or add one other fast-growing photo voltaic expertise firm referred to as Shoals Applied sciences Group (SHLS) to the Nanalyze Disruptive Tech Portfolio?

About Shoals Applied sciences Inventory

Based mostly within the (different, different) Portland in Tennessee, Shoals is a virtually 30-year-old producer of even much less horny elements of photo voltaic infrastructure often known as electrical stability of system (EBOS). The corporate started life in 1996 as a element provider within the automotive business earlier than pivoting in 2002 to the nascent photo voltaic business. Initially, it equipped elements to First Photo voltaic earlier than growing new photo voltaic infrastructure applied sciences round EBOS.

We’re MBAs, not grasp electricians, so we’ll hold this easy about what apparently makes the choices from Shoals progressive and engaging to prospects. EBOS encompasses all the ins and outs – cable assemblies, inline fuses, junction packing containers, and so forth. – that join photo voltaic panels to inverters constructed by firms like SolarEdge. The corporate has principally developed modular, easy-to-install merchandise referred to as “interconnect harnesses” to interchange the very laborious wiring structure often known as homerun EBOS programs. The interconnect harnesses are then linked to a proprietary above-ground feeder cable known as the Huge Lead Meeting (BLA). The “combine-as-you-go” idea by Shoals drastically simplifies set up of photo voltaic panel tasks by holding the infrastructure above floor, lowering the variety of wire runs and elements, and eliminating the price of utilizing extremely paid electricians to do the work, amongst different benefits.

In impact, Shoals has engineered a option to cut back a serious ache level for photo voltaic tasks. The outcomes as measured by income have been spectacular to date:

The corporate isn’t slowing down. Income development is predicted to clock in at between $480 million and $510 million this 12 months, representing development of between 32% and 36%. That’s fairly in keeping with the final a number of years. ESG buyers should simply be shopping for up shares of Shoals Applied sciences inventory like there isn’t any tomorrow as a result of, you understand, local weather change, decarbonization, and tax subsidies. Proper?

What’s the Market Alternative for Shoals Applied sciences Inventory?

You’ll be able to most likely guess the reply to that one. The corporate went public in January 2021 at a valuation of greater than $5 billion after a profitable IPO at a time when nearly any public providing of a tech inventory might flip a founder right into a paper billionaire. To the credit score of Shoals, administration didn’t make a cope with a particular function acquisition firm (SPAC) like so lots of its friends. Nonetheless, Shoals did profit from the SPAC impact for a short time earlier than succumbing to the inherent volatility within the tech sector and photo voltaic specifically.

Right now, the corporate is valued at about $3.1 billion, with a easy valuation ratio of 6.5, which places it proper according to the common of our little universe of shares within the Nanalyze Disruptive Tech Portfolio. So, we all know that it’s seemingly pretty valued based mostly on the present macroenvironment. As well as, many indicators recommend that photo voltaic will change into the dominant supply of vitality as early as 2027. 

That would definitely recommend a large complete addressable market (TAM) alternative. In Q2-2023, the U.S. photo voltaic business alone put in 5.6 gigawatts of capability, in accordance with the Photo voltaic Vitality Industries Affiliation. Let’s name it a really conservative 20 gigawatts on an annualized foundation. Based mostly on 14.6 cents per watt that EBOS accounts for between development (5.4 cents) and set up (9.2 cents) prices, that works out to a present TAM of about $2.9 billion (20 billion watts X 0.146 per watt). Shoal’s 2023 outlook of between $480 million and $510 million implies a market penetration of about 16.5% to 17.5%.

Greater than half of all U.S. photo voltaic installations in 2022 utilized Shoals’ merchandise, in order that they’re undoubtedly a pacesetter with room to develop. As at all times, we’re extra to know what recurring income streams they’ll have the ability to notice as soon as the mad spending on photo voltaic {hardware} slows down. Photo voltaic firms want enterprise fashions that provide high-margin recurring income streams that may prop up {hardware} margins which are always underneath stress.

Ought to You Purchase Shoals Applied sciences Inventory?

Administration acknowledges that the corporate wants a method to develop past its present market, together with growing its enterprise outdoors of the present U.S. bubble through which it operates. A lot of the extra rapid focus, nonetheless, seems to be on growing new services round vitality storage and electrical automobile (EV) charging. Shoals estimates a home TAM of $3.5 billion for the latter market alone. 

As an illustration, it just lately partnered with Brookfield Renewable (BEP), a utility that makes a speciality of renewables, to roll out the corporate’s new Gas by Shoals® product providing, an above-ground EV charging infrastructure resolution. The companions are pitching it as a Charging-as-a–Service (CaaS) the place prospects reminiscent of EV fleet operators pay a month-to-month payment fairly than upfront prices. The technique is to leverage Brookfield’s deep pockets and international attain with Shoal’s “combine-as-you-go” applied sciences. As we’ve famous earlier than, loads of EV charging firms have struggled to develop a worthwhile enterprise mannequin round promoting electrical energy to automobile homeowners.

We now have another near-term issues round Shoals Applied sciences inventory, largely centered round buyer focus. For one factor, nearly all of its revenues nonetheless come from the USA after almost three a long time in enterprise, so profitable growth to greater abroad markets is just not assured. The larger challenge, nonetheless, is that the corporate’s buyer base consists primarily of engineering, procurement, and development companies (EPCs) that construct photo voltaic vitality tasks. On the plus aspect, Shoals claims it really works with 14 of the highest 15 and 17 of the highest 25 photo voltaic EPCs within the business, and can be attempting to win over greater than a dozen others. Nonetheless, its 5 largest prospects accounted for greater than 35% of 2022 revenues. Laborious to see buyer diversification occurring any time quickly based mostly on the area of interest product portfolio. 

As well as, regardless of the modularity of the “combine-as-you-go” system resolution, every challenge is customized and often takes 12 months or extra to finish from preliminary quote to remaining cargo. These contracts for photo voltaic system options can vary in worth from a number of hundred thousand to a number of million {dollars}, so these are massive industrial tasks with lengthy lead instances. A gentle backlog, at present at about $546 million, ought to assist offset a number of the uncertainty round predicting future revenues however we’re not overly eager on the present enterprise mannequin or buyer focus.

Conclusion

The present success by Shoals Applied sciences to develop revenues so quickly has been 20 years within the making. Its potential to deal with a comparatively small however necessary ache level within the photo voltaic business and strategy $500 million in annual revenues reveals simply how mature the market has change into. The long-term prospects are intriguing if the corporate can overcome a restricted home TAM by increasing internationally and growing new merchandise in adjoining markets like EVs and vitality storage. From our perspective, there’s actually no rush to exit and purchase shares of Shoals Applied sciences inventory right now.