Solar Play Shoals Technologies Has Bright Growth Prospects

Less than two months removed from its IPO, Shoals Technologies Group (NASDAQ:SHLS) may be one of the hottest solar technology plays under the sun. And while there is no shortage of solar-related upstarts these days, the company has some competitive advantages that points to sustainable growth.

This week the Solar Energy Industries Association (SEIA) and Wood Mackenzie reported that the U.S. solar industry experienced 43% growth in 2020 despite pandemic-related challenges. Over the next ten years, solar installations are forecast to more than quadruple driven by residential, commercial, and utility demand.

This means there will undoubtedly be plenty of solar technology winners emerge this decade —and Shoals Technologies looks to have some of the brightest prospects.

What Does Shoals Technologies Do?

There seem to be a lot of solar energy projects sprouting up these days and Shoals Technologies is playing a bigger role. It provides electrical balance of systems (EBOS) solutions that transfer electricity generated by solar panels to an inverter and then on to the power grid.

The main challenge associated with solar energy is still cost. Shoals Technologies stands out in this regard because it has been able to bring down the installation cost of its EBOS solutions while maintaining quality and safety. As the first company to introduce cost-effective "plug-n-play" EBOS solutions it sits in an advantageous position relative to competitors that offer harder to install conventional EBOS systems.

Its flagship product, the Big Lead Assembly (BLA), has been well received by the market due to its reliability and because a licensed electrician isn't required to install it. Soon Shoals Technologies will be launching its next-generation product (BLA 2.0). This along with opportunities to move into electric vehicle infrastructure and battery storage stand to diversify the business and generate complementary growth.

Shoals Technologies has a growing customer base but at this point it is all in the U.S. This is a good thing as there is still a long runway for international expansion.

How Did Shoals Technologies Perform in Q4?

In its first report since becoming a public company, Shoals Technologies eked out a $0.03 per share profit on revenue of $38.8 million. Both figures beat the Street by a tad and overall, it as a solid debut. The order backlog increased 46% to $157 million, an encouraging metric heading into a new year when industry conditions are expected to normalize.

For all of 2020, revenues grew 21% to $175.5 million. Based on management's outlook for 2021, growth is about to accelerate. Management sees this year's revenue growing approximately 34% at the midpoint to $235 million along with profits of $49 million. To achieve a 20%-plus net margin (compared to 19.2% in 2020) would be no small accomplishment in the solar technology space and would reinforce Shoals Technologies' pricing advantage.

Like many young solar challengers, Shoals Technologies doesn't have the sunniest balance sheet. It exited the quarter with a long-term debt balance of more than $335 million compared to a modest $10 million cash position. But with a massive growth opportunity on its hands, there is no time like the present to pursue product line, domestic, and overseas expansion. As cash flow improves, the balance sheet should gradually improve over time—but with the company still in high growth mode, this could take time.

 Is Shoals Technologies Stock a Buy?

Three sell-side analysts have chimed in on Shoals Technologies since this week's report. Roth Capital and Oppenheimer both called the stock a 'buy' with price targets of $44 and $47, respectively. Cowen & Company had a lot of positive things to say but for valuation reasons opted to keep a 'hold' rating. 

With the stock having run up to close to $40 over the last couple of days, there doesn't appear to be much upside based on the most recent analyst opinions. Traders certainly bid up the price in anticipation of a good report and outlook and got just that.

Buying Shoals Technologies here does feel a bit late to the party, but like many recent tech IPOs, there is likely to be plenty more volatility ahead. This means that a bout of short-term profit-taking could turn into a better entry point.

In the near-term the company stands to benefit from the Biden administration's lofty infrastructure spending ambitions. If it involves an extension of the solar investment tax credit (ITC) as widely expected, this could be a boost to the entire solar space.

Looking past this year, Shoals Technologies has attractive growth opportunities stemming from the global adoption of clean energy policies and associated demand from households and businesses for affordable solar energy solutions. If it can rise above the competition and execute on these opportunities, Shoals Technologies shareholders may be able to sail off into the sunset.