Nextracker: Higher yield for solar plants
Global market leader in solar trackers, with a filled backlog and high margins
Founded in 2013 by solar veteran and CEO Dan Shugar, Nextracker (EV $5.4b) is the global market leader for intelligent solar trackers. A combination of hardware ingenuity and smart software, Nextracker’s independently movable rows and axes enable solar panels in utility-scale power plants to follow the sun’s movement and optimize performance while preventing damage from hailstorms and other solar panel destroying weather events.
Nextracker holds 104 U.S. patents, with 295 more pending, and is poised to deliver end-to-end solutions for the solar value chain, offering anything but the actual solar panels.
For customers, Nextrackers products are an easy buy as they can demonstrate a significant ROI improvement through higher energy yields - up to a 7% reduction of the Levelized Cost of Energy (LCOE). This has resulted in over 100GW of solar plants using Nextracker, leading the market by a wide margin.
As per their Q2 earnings report published in August 2024, they have a filled $4b backlog with LTM revenue of $2.7b, a LTM 24% operating margin and LTM ROIC of 52.5% with 30% revenue growth for the past 2 years - and it’s currently trading at just a 7.96x EV/EBITDA.
So why is NXT trading at such a valuation, having this high growth & margin?
One of the main reasons for this is an overall downturn in the solar market, where former industry darlings like Enphase and Solaredge enjoyed 800%+ run ups followed by 70%+ drawdowns to date. The run-ups are explained by the monetary policy (ZIRP) in COVID times and by governmental financial incentives to buy solar panels. The drawdown is caused by discontinuing both ZIRP and financial incentives, leading to cratering revenue for most solar companies (but not Nextracker) as previous growth rates were unsustainable.
With just 5% of global energy generation delivered by solar while being the most popular new energy generation method, there’s ample room for growth. In the U.S., the Energy Information Administration is forecasting a 26% CAGR in solar investments over the next 5 years and for solar to become the #1 source of power.
In this backdrop, I expect Nextracker to outperform due to their relentless focus on solving customers problems coupled with a capital light business model and sound financial management.
Nextracker’s product & the solar energy market
The growth of the global energy market (expected to double in demand by 2050) and the net zero goal of most countries make solar play a very important role. Consumer solar installations are often a no-brainer when you own/access your own roof, and for industrial installations there is a solid queue of yet to be installed solar installations.
Worldwide, just 5% of total energy generation is delivered by solar, yet it is the most popular new energy generation method as cost improvements are being made every year.
Nextracker plays an important role in decreasing costs and increasing yields. As the CFO has mentioned in several earnings calls, Nextracker is constantly seeing results in being able to reduce their costs, passing these savings on to the customers and as such grow the TAM of solar trackers.
Reducing costs is important, as solar panels itself become cheaper and more effective, influencing the ROI calculation of using Nextrackers products.
100GW Shipped so far
Globally, Nextracker has shipped more than 100GW across six continents. Their customers are engineering & construction firms, who are contracted to build solar plants, as well as solar project developers and owners. In the U.S., the market is expected to add 40GW in solar per year with a much larger amount in queue.
Compared to slapping solar panels on rooftops, utility scale projects take a significant time to develop, as solar panels need a lot of land and the accompanying permits.
Nextracker engages with these customers from the get-go and aims to solve any problem they encounter that is not related to the panels itself.
Think about building on difficult terrain, mowing costs, cleaning costs, mitigating shade, adjusting for cloud cover, dual land-use for electricity generation and farming, extreme weather events and so on.
I was impressed when I learned about Nextrackers product strategy, as it’s evident that they care about delivering an increase of the unlevered return of solar panels to their customers and break it down into 3 strategic components:
1) Bringing down the installed cost of the system
2) Increasing the energy generation capacity of the system
3) Reducing the operational and maintenance cost of the system
Let’s explore these further.
Bringing down the installed cost of the system
Nextracker has a capital light operating model, where they’ve outsourced the manufacturing of simple mechanical components, like motors and steel frames, to 80 suppliers across 19 countries. This gives advantages in terms of price, delivery and optionality.
In 2018 they shifted production from China to other non-China vendors and are currently actively working to bring their final assembly for 100% into the USA, where already a lot of the manufacturing happens, making them eligible for tax credits.
They’re also actively driving down material use and the CO2 footprint, resulting in using 30% less steel than before - important when generating clean energy.
Another cost-saving initiative comes from two acquisitions in 2024:
The $119m acquisition of Ojjo, a California-based company specializing in foundation technologies (placing the trackers into the soil). Ojjo’s innovative truss system uses half the steel of conventional foundations.
The $48m acquisition of Solar Pile International, that manufactures ground mounts with a patented pile system, reducing the cost of dealing with different soil types and difficult terrain.
Both acquisitions give Nextracker a stronger grip on the solar value chain and a fuller service offering, as now any customer with any type of land can knock on Nextrackers door to deliver anything but the actual solar panels - with potential expansion into the solar+battery offering instead of only solar trackers.
Increasing the energy generation capacity of the system
Solar yields depend on how much direct sunlight they can capture and several factors influence this. For individual panels, the most important yield increase is to create the optimal angle for catching sunray’s as the sun moves around the sky during the day.
And that’s quite complicated if you consider a industrial solar farm that spans several acres.
Nextracker has designed independently moving rows, that can adapt to the cloud cover and the uneven terrain they’re build on, while also preventing shade from one panel influencing another.
Compared to static mounts, this helps to increase the energy generation capacity and is one of the reasons Nextrackers keeps on generating sales: they can show to any customer what the ROI would be with Nextrackers products and without.
It’s also worth mentioning that Nextracker is pioneering in the field of agrovoltaics , a term used for a solarpunk style use of land: farming + energy generation.
This dual land use means that a farmer can now also start generating electricity and sell that in addition to selling its crops or livestock. And the livestock can in turn help grazing and and keeping the area around the solar panels below a certain height, while the solar panels can also provide the necessary shade for livestocks and crops.
Reducing the operational and maintenance cost of the system
Moving parts often need maintenance, something that can really cut in the profits. Nextracker specializes in advanced mounting and specialized racking systems, designed in such a way that they can be installed without tools and the ability to adjust or release cables easily. Their torque tubes are self-lubricating and the clamps and mounts can withdrawn harsh environmental conditions.
Another innovative cost saving method comes from smart software that deal with extreme weather events like hailstorms. Insurance claims from hail damage are rare, just 1.4% of the total number of claims, but they make up 54% of the total incurred cost. Nextracker detects when there’s a hailstorm about to happen and places to panels in a 60 degree angle, significantly reducing the damage leading to much lower insurance premiums.
These three strategic components exemplify that Nextracker has earned their market leading position and has a wide moat: there is no other company that offers this end-to-end solution and can demonstrate cost savings & higher yields for solar plants.
I also respect the strategic focus on anything but the solar panels, as solar panels are in a race to the bottom due to competition from China and are sensitive to commodity prices. The management team has simply decided it’s not their game to play and instead focus on what they’re already really good at.
Financials
First let’s start with a brief history of Nextracker as it’s important context for the numbers before 2023.
Early 2023 Nextracker completed their spin-off from Flextronics (NASDAQ: FLEX), after being acquired in 2015 for $300m - just 2 years after Nextracker was founded. Flextronics shareholders received Nextracker stock, that IPO’d in Feb 2023 for $24 ($40 as of 09/08/2024).
Because Nextracker was part of Flextronics before 2023, the numbers before 2023 are subject to that type of corporate structure and any managerial or accounting biases.
Revenue & Margins
With slight seasonality, the topline revenue has grown almost every quarter and shows quarterly YoY growth between 20 and 50%. As per the latest Q2 earnings, the current backlog is over $4b (tripled in 2 years) and is expected to turn into revenue over the next 8 quarters.
Gross margins have steadily improved from 17% at the start of 2023 to 33% in the last quarter. Operating margins mirror this growth and if they can settle at 20% long term (LTM operating margins are 24%) with revenue growth of 10% (15% guided), my DCF model would price the stock at $66.30 vs. the $39.78 today - a 66% discount.
The revenue mix has been roughly 70% US and 29% Rest of the world, with the business growing much faster than ROW.
As for guidance, Nextracker has reaffirmed we can expect high revenue growth and consistently high operating margins:
Balance sheet
Since going public early 2023, Nextracker has significantly grown the equity portion of the balance sheet and build a strong cash position, that has been put to work for M&A. Ojjo and Solarpile were both acquisitions where Nextracker has a long track record of working with their products, exemplifying a thoughtful approach.
Limited by the spin-out structure from Flex, Nextracker is not planning to execute any share buybacks or dividend payouts.
Return on investment, equity and assets
Given the capital light business model, Nextracker enjoys a high ROIC over 45% in the past 4 quarters, with LTM ROIC at 52.5%.
Their return on equity and assets is also much higher than their peers and shows that any cash is best reinvested instead of paid out.
Valuation
On a EV/EBITDA basis, Nextracker currently trades at the cheapest ratio (7.96x) in its history and is priced slightly below their industry peers: FSLR at 13.19x and ARRY at 11.83x, that both lack the impressive growth and margins of Nextracker.
It’s also far below consumer solar hardware provider Enphase (22.8x EV/EBITDA), that has seen YoY revenue fall by nearly 50%.
Multiple expansion to match direct competitor Array Technologies (ARRY) would lead to a 48% increase at current share price.
And when I run a DCF (Aswath Damodaran FCFF model) with varying sensitivity for long term growth and cost of capital of 9.56% (based on 70/30 USA vs. ROW revenue split and the Electrical Equipment industry), the conservative scenario on 2-5Y growth and margins already gives a 26% discount to current prices:
So why is Nextracker undervalued?
Whenever you find a discount to current market prices, you should ask yourself why and ‘How are other market participants looking at this opportunity?’
In the case of Nextracker I believe it’s a solid company with good management that is currently operating in a distressed industry, due to high interest rates and discontinued governmental incentives.
The bad performance of its peers is weighing down on the whole solar industry, as evident in the Invesco Solar ETF:
Perhaps when interest rates go down and solar plant project financing becomes easier to obtain, the market will shine its light on this sector again.
There’s also the bear case of a potential Trump presidency, who has on one side advocated for oil & gas companies (“drill baby drill”), that would make them cheaper but not cleaner alternatives to solar (Trump doesn’t care about clean energy).
The other side is that Trump has also said he wants to produce as much cheap energy as possible, and with the Democrats wanting to invest in clean energy anyway, it could be that solar energy has bipartisan support (as it’s always been).
Wrapping up
Given the strong product-market fit, customer focus and sound financial management, I believe Nextracker is uniquely positioned to capture cash flows in a 26% growth CAGR industry. Based both on multiple expansion and DCF, I find the stock to be significantly undervalued.
Further materials
Disclaimer: This is not investment or financial advice. I (“Lowbill Research”) currently hold a stock position in Nextracker (NXT) at the time of writing this article. All information provided herein by Lowbill Research is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell any security.
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