Array Technologies: Potentially strong tailwinds, but wait for better entry (NASDAQ:ARRY)
Network technologies (NASDAQ:ARRY) went public and immediately faced a cascade of challenges, both macroeconomic and operational, that contributed to its post-IPO share price crash and seemingly put its future in jeopardy. The company would have see its common stock trading as low as $5 per share, down from its IPO price of $22 per share. The zeitgeist during this fall was characterized by uncertainty, fear, and doubt about what was a clear long-term play on the growing demand for solar energy in a world in search of decarbonization. The commons retracement also came in contrast to other pick and shovel games on solar power growth that would see their pandemic-era runs continue to reach new heights.
The situation now appears completely reversed as steel prices fall precipitously and the recently signed Inflation Reduction Act paves the way for a dramatic expansion of solar energy. Array provides large-scale solar tracking technology to solar projects with DuraTrack, a single-axis solar tracker, and SmarTrack, solar trackback machine learning software that further increases production.
The direction of the sun changes throughout the day and Array’s solar tracking technology ensures that the PV panels are constantly facing its direction. This maximizes energy production and increases the performance profile of these solar projects. DuraTrack has been installed on over 900 large-scale projects worldwide, which together represent approximately 22 GW of installed capacity.
Revenue recovery is now spectacular and sustainable
Steel has seen a steady decline in prices over the past 12 months as the specter of a global slowdown in construction and a widespread recession cloud the near-term outlook for the commodity.
However, the extent to which these will be reflected in Array’s gross margins has been limited as the company does not buy steel at spot prices, but rather takes advantage of long-term fixed contracts which better protect them from raw material fluctuations. Therefore, the collapse in steel prices will likely not begin to be fully reflected in earnings for the latter parts of fiscal 2023 until 2024.
The company last reported earnings for its second quarter of fiscal 2022, which saw revenue of $424.9 million, up 116.2% from the fiscal quarter. previous year and a whopping $87.97 million overrun on consensus estimates. Array has now achieved three consecutive quarters of sustained revenue growth.
The company’s gross profit margins in the quarter, at 11.15%, also represented a marginal increase from gross profit margins of 10.4% in the prior year quarter. This means that overall profitability increased with an adjusted EBITDA of $25.9 million compared to $9.9 million in the comparable quarter of the previous year. However, net income and cash from operations were negative, with negative free cash outflows totaling $12.2 million.
Year-over-year cash burn of $196 million put pressure on the company’s balance sheet. Cash and cash equivalents were $51 million at the end of the last reported quarter. However, after the period ended, the company won a $42.75 million legal settlement in a lawsuit against Nextracker for misappropriation of trade secrets. This is compared to a total backlog of $1.9 billion that the company is now striving to fully realize.
This strong growth and a potentially more profitable future for Array was compounded by the Inflation Reduction Act. Described by Array management as the most impactful legislation for the solar industry, it will allocate $370 billion over 10 years to decarbonization initiatives. The law is expected to provide investment tax credits to spur the deployment of solar power in the United States and is expected to drive demand for solar power forward, dramatically changing the industry’s five-year outlook. Solar deployments are now expected to increase by 40%, or around 62 GW, compared to pre-Cut Inflation Act projections through 2027.
Thus, the contribution of solar energy to the US electric grid is about to increase significantly. This represented only 3% of electricity generation in the United States from all sources in 2020 and is now expected to reach at least 10% by 2030. It is important to note that these projections predated the reduction in inflation.
Large-scale solar power: growth like never before
The Inflation Reduction Act will enshrine the role of solar power in American energy. Array stands to benefit from this deployment with its solar tracking technology. High steel prices, once a major headwind for the company, now appear to be a settled issue. The steel inflation caused by the pandemic after the pandemic has now almost turned into a complete crash.
While future growth, as suggested by Array management, will be unlike anything we’ve seen, a global economic recession would more than likely put a damper on common stocks which have rebounded strongly in recent weeks. . A decrease in current investor enthusiasm could see stocks drop lower than their current highs. So while Array Technologies is a great company for those looking for a way to get to grips with the ongoing solar boom, I’ll be waiting for a potentially better entry point.