Shoals Technologies Stock: Growth With A Competitive Moat (NASDAQ:SHLS)


Солнечные панели - солнечная электростанция - вид с воздуха

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Investment Thesis

Although Shoals Technologies (NASDAQ:SHLS) is trading well below its initial public offering price, fundamentals have improved significantly. BLA system was a real revelation and allowed SHLS to increase its market share from 7% in 2017 to 37%. However, the growth potential has not yet been exhausted. Shoals’ explosive growth and scaling will be driven by its plans for the electric vehicle charging market and its BLA system that provides a powerful competitive advantage. We expect revenue to grow rapidly as the market potential is vast and the company has strong competitive positioning. We expect profitability to improve as ConnectPV is integrated. According to our valuation, the company is trading below its fair market value. We rate shares as a Buy.

Key Risks

Company Profile

Shoals Technologies Group, Inc. provides energy storage solutions and charging stations for electric vehicles. Shoals operates in two segments: Systems Solutions develops, designs, manufactures, and installs turnkey solutions, while the Components segment manufactures and sells individual components. SHLS sells its products to engineering and construction firms that build solar power projects. The company was founded in 1996 and is headquartered in Portland, Tennessee.

Revenue by segment

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Innovation Creates A Competitive Moat

“Our patents are much more than intellectual property. They’re a testament to the quality of engineering talent at Shoals and our collective determination to problem solve on our terms” – Shoals Technologies

The EBOS system contains all the components needed to transfer the electrical current generated by the solar panels to the inverter and ultimately to the power grid. Such a system is required for every solar project and is compatible with all types of boards, inverters, and mounting systems. However, these are complex and dangerous systems that lead to equipment breakdowns, fires, and deaths. In addition, they make up only 6% of the project’s cost, and installation work can be up to 150% of the price of the EBOS system itself. Therefore, SHLS invented and patented the “BLA” system, a “plug-n-play” solution that makes the installation safer and the system itself more reliable and economical. BLA reduces installation costs by 43% and material costs by 20%. BLA system is a real revelation. Since the beginning of the year, the number of developers using BLA has quadrupled. As of the last report date, 12 clients were in the process of transitioning to the system. Thanks to the system, Shoals’ market share increased from 7% in 2017 to 37% in 2021. The market share is expected to reach 60% in a few years.

Industry Opportunities

“And candidly, our primary focus right now is making sure we have the capacity to deliver on the tremendous demand that we’re seeing across our business.” – Q3 2021 Conference Call.

This quote reflects well the market potential of the company. According to IHS Markit, worldwide photovoltaic capacity will double in the next five years, and the growth rate of the global market for solar projects will be 5% CAGR over the same period. Thus, the company is taking away share from competitors in a market expected to double in the coming years. Notably, Shoals sells its solutions to a large utility market six times the size of the private home market. This represents the excellent potential for business growth.

Shoals now draw 97% of its revenue from the US, but the market potential is enormous as more countries worldwide commit to renewable energy. We expect SHLS to expand globally in the future, given the solid competitive positioning and growing demand for renewable energy.

EV Charging Stations

Due to the growth in demand for electric vehicles, the issue of providing infrastructure is acute, and the main problem is the lack of charging stations. Demand for electric cars is expected to rise, especially as automakers phase out combustion engine vehicles.

There are over 46,000 public electric vehicle charging stations in the US. At the initiative of the Biden administration, President signed a plan and ordered funds to be directed to increase charging stations to 500,000 by 2030. The charging station market will grow at a CAGR of 30.26% until 2028. Shoals partnered with SKYCHARGER and Luminance to accelerate product distribution. The company already has pre-orders for charging stations from network operators and large utility companies. In addition, Shoals plans to reduce the cost of production and installation of solar stations by 20-30% compared to traditional solutions, making its offer unique and will undoubtedly increase demand. If SHLS can successfully enter the EV charging market, the market will reevaluate the company’s stock substantially as EV companies trade at higher multiples on average. For example, a deeply unprofitable EVgo (NASDAQ:EVGO) is trading at an EV / Sales multiple of 85x.

Financial Performance

For the past three years, the company has been increasing revenue at a CAGR of 30%. For the last three quarters, SHLS’s revenue has grown by 11.94%, 37.52%, and 13.77%, respectively.

SHLS Revenue

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In 2018, the Gross margin was 21.17%, and the operating margin was 10.69%, today these figures are 40.92% and 23.52%, respectively. The net profit margin in the third quarter of 2021 was 4.12%. Net margin pressure was driven by increased revenue in the Components segment, which has lower margins than Systems Solution.

The acquisition of low-margin ConnectPV also put pressure on the net margin. During the latest conference call, the CEO said that ConnectPV will start receiving components from Shoals’ supplier from the second quarter. This should even out ConnectPV’s and Shoals’ gross margins. An increase in ConnectPV’s gross margin to the level of Shoals will lead to an increase in total gross margin by about two percentage points.

Shoals Technologies: gross profit margin, operating margin, and profit margin
Data by YCharts

The company has a relatively high debt burden. Net debt is four times more than EBITDA [TTM]. EBITDA covers interest expenses 3.9 times. However, Shoals increases revenue and EBITDA, so we expect ratios to decline.

Net Debt to EBITDA

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Thus, we expect the company to maintain a strong growth rate in the coming years as the target market grows and SHLS’s competitive positioning is very strong. Potential profitability looks promising. In the short term, margins will increase after the integration of ConnectPV. In the long term, profitability will grow due to the realization of economies of scale, as the trend towards an increase in operating and gross margins is already visible, and SHLS is still a mid-cap company.

Valuation

Within our DCF model, we made several assumptions. We expect revenue growth in line with the Wall Street consensus. Margins and other relative indicators are predicted based on historical dynamics and the current trend. The terminal growth rate is 6%. Our assumptions are presented below:

Assumptions

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Based on our assumptions, the expected dynamics of key financial indicators are presented below:

Key indicators

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With a Stable growth Cost of Equity equal to 9.13%, the Weighted Average Cost of Capital [WACC] is 8.8%.

WACC

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With a Terminal EV/EBITDA of 20.26x, our model projects a fair market value of $3,2 billion, or $31 per share. The company is trading at a solid discount to our estimate of fair value.

You can see our model here.

Conclusion

Shoals has excellent prospects in the growing markets for solar energy and electric vehicle charging stations. Shoals’ competitive advantage, growing demand, and geographic distribution will drive future financial results. The company’s shares are trading well below our estimate and have great potential in the long term. We are bullish on the company.



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