Is the biggest solar IPO in history a buy?
Network technologies (NASDAQ:ARRY) hit the public markets on October 15 with a bang. The biggest IPO for a US-based solar company valued Array at more than twice the initial market capitalization of any previous solar company IPO on the first day of trading. Profitable, fast growing and with fresh cash in its coffers, is Array Technologies stock a buy?
An overnight success 30 years in the making
Array Technologies manufactures the mechanical structures used to deploy large solar systems for electric utilities. But Array doesn’t make just any mechanical structures – it makes single-axis trackers or smart structures that maximize the amount of light captured (and electricity produced) by tracking the movement of the sun.
Since Array first introduced its trackers, they have become increasingly sophisticated, with its latest products leveraging machine learning techniques to optimize system output under various conditions, such as cloudy days and uneven ground, while reducing the vulnerability of the systems to bad weather. events such as snow and even hurricanes.
Array launched its first product in 1989, long before solar energy existed. This means that the company has had plenty of time to build a solid organization, flesh out its product and become an industry leader. Today, Array Technologies has deployed its trackers in more than 22 GW of utility-scale solar projects, a market segment expected to grow 45% over the next five years.
And Array Technologies not only produces a leading product in a growing market, it does so profitably. In 2019, it reported revenue of $647.9 million with gross margins of 23%, resulting in a net profit of $39.7 million. In the first six months of 2020 alone, those numbers jumped to $552.6 million, 25%, and $76 million, respectively. It’s the kind of performance and growth that Wall Street loves, with shares of Array soaring 65% on the first day of trading.
A bigger opportunity might arise
Thus, Array has built a profitable business in a growing space. But, while the market analysis firm Mackenzie Wood expects the number of tracker installations to continue to grow for the foreseeable future, it also predicts that the dollar value of the tracker market will eventually “flatten” as solar system prices continue to rise decline, which will put pressure on margins.
This is the question an investor must answer in deciding whether to invest: Can the company continue to grow revenue while protecting its margins?
Currently, Array has 17% of the global tracker market and derives approximately 87% of its revenue from the United States. On the other hand, its main competitor and current market leader, NEXTracker, a flex (NASDAQ: FLEX) company – controls a 30% share of the global tracker market but has a much more international footprint. However, NEXTracker and Array have similar shares of the US market.
So if Array can do internationally what it has done in the US and increase its share of projects to better match NEXTracker’s share, it is set to grow faster than the overall tracker market over the course of of the next five years. And the company said it plans to use its new IPO funds to do just that.
Will the margins hold?
The challenge in solar is usually the margins. Solar system prices will continue to fall as the industry strives to turn everything it touches into a commodity. However, intellectual property (IP) in the form of new product design and innovative software has proven beneficial for other companies in the solar industryenabling them to protect and even increase their margins over time.
Array has several key advantages here. Its trackers include significant software intellectual property that may be continually improved and may be difficult to copy. The company claims that its latest machine learning software can increase a system’s output by up to 5%. Because solar projects count their lifespan in decades, 5% more power is actually a big deal.
In addition, Array’s products are distinguished by their simple mechanical design, with few moving parts requiring little maintenance. The company claims its latest design can reduce operating costs by up to 42% over the life of a project. In international markets, where technical support from vendors can sometimes take days or even weeks, simplicity and reliability can be significant advantages.
As indicated above, investors interested in participate in the growth of the solar industry would do well to seek out companies whose products can grow as fast or faster than the overall market while protecting their margins. If Array can show it can succeed internationally, while protecting its margins, the company could continue to delight Wall Street for years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.