Solar is finally having its day in the sun as the Invesco Solar ETF reaches new highs, aided by the merger of Sunrun and Vivint which have soared to the moon. The reason? Everything points to solar being the theme du jour for Robinhood day-trader types to pile into. Further evidence to support this claim might be the recent IPO of Array Technologies (ARRY) which doubled on the first day of trading, and now sports a $5 billion market cap. What everyone’s getting so excited about is something called “solar tracking.”
The Growth of Solar Tracking
In our previous piece on How a Solar Panel Tracking System Works, we talked about how fixed solar panels can produce a lot more energy if they rotate to track the sun, something that’s called solar panel tracking. Solar energy projects that use trackers generate up to 25% more energy and deliver a 22% lower levelized cost of energy (LCOE). Trackers are now more common than not, at least in the United States, where approximately 70% of all ground-mounted solar projects constructed during 2019 utilized them. That’s been a great source of growth for Array Technologies, one of the world’s largest manufacturers of ground-mounting systems used in solar energy projects.
About Array Technologies Stock
Founded in 1989, Array Technologies is the world’s second-largest supplier of solar tracking systems with a 17% share of the global market, trailing only market leader Nextracker’s 30% share. That’s according to an article by GTM which says Array is also investing in machine learning for its trackers which have a clear differentiation from competing trackers.
The basis of Array’s competitive advantage is a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. (U.S. Patent No. 8,459,249 – expires in 2030.) Their largest competitor’s design requires one motor for each row of solar panels. As a result, Array’s products have greater reliability, lower installation costs, and reduced maintenance requirements. An independent study found that projects using Array’s tracker system would achieve a 6.7% lower LCOE, 4.5% higher net present value, and 31% lower operations and maintenance cost than projects that used competing single row control architectures.
Customers are lining up to purchase Array’s trackers with 2019 revenues more than doubling to nearly $650 million, a year which they managed to attain profitability.
Credit Array Technologies S-1 Filing
The growth continues. Halfway through 2020 Array Technologies had already hit $550 million in revenues. If they keep that up, they’re on track to clear over $1 billion in revenues in 2020.
The bull thesis is obvious. Solar is lower than the cost of building new power plants that burn natural gas or coal, and the ESG types are more than happy to invest in solar projects. Solar tracking makes economical sense to deploy for new projects. The cost of tracking makes up 15% of the cost of a new solar project, so that’s a meaningful amount of revenue to capture up front. What we’re interested in focusing on are the risks.
Solar is Risky Business
If you’ve been a long-time investor in solar, you know that up until this past year, retail investors haven’t fared well. It’s difficult to predict where the market is going when the technology changes so quickly. So do regulations.
We’re risk-averse investors who focus more on what could go wrong than what could go right. In 2019, 87% of Array’s revenues came from the United States, where 70% of the total utility scale solar generation capacity uses their trackers. From 2014 to 2019, annual installations of ground-mounted solar generation capacity in the U.S. grew at a compound annual growth rate of 20%.
Fueling that growth is the solar investment tax credit (ITC) which provides a federal income tax credit for developers of commercial solar projects. Under the current text of the legislation, the tax credit phases down over a four-year period beginning in 2020 as follows: 30% for 2019, 26% for 2020, 22% for 2021, and 10% for 2022 or later. This decreasing incentive will result in slowing growth, not to mention a great deal of uncertainty surrounds the coming U.S. elections.
There’s clearly room for growth outside the United States, where only around 30% of international solar energy projects used trackers compared with approximately 70% in the U.S. today. Outside ‘Murica, Array will need to compete with the Chinese who are becoming quite experienced when it comes to solar projects.
Regardless of where Array does business, they’ll need to adapt their business model to include recurring revenues instead of just project-based revenues.
It’s easy to focus on the company’s tremendous revenue growth and look past the business model which depends on “continued growth in the amount of solar energy projects installed each year.” There are no recurring revenues here. Array makes money by selling tracking systems to developers of solar projects on a contractual basis with contracts lasting from days to several months. Solar energy projects are now expected to operate for at least 30 years, and Array recognizes an opportunity to develop recurring revenues around these projects stating:
We believe that the significant and continued growth in our installed base creates opportunities to sell products, software and services related to our tracker systems. Our strategy is to introduce a targeted set of offerings over time, including hardware and software upgrades and retrofits, as well as preventative maintenance and extended warranty plans that we believe can generate high margin, recurring revenues.
Credit: Array Technologies
Array plans to expand into related products that are used in solar energy projects but that they do not currently supply, whether through acquisition or organically. Executing on this plan may also help reduce their revenue concentration risk.
Having your revenues concentrated within one country is risky, and so is having a small number of clients provide a large chunk of revenues. In 2019, Array’s largest customer and five largest customers constituted 17.2% and 50.1% of total revenues, respectively. For 2019, two customers, Blattner Energy Inc. and EDF Renewables, made up 28.7% of revenue (these were the only customers constituting greater than 10% of total revenue). A loss of a key customer could have a major impact on the company’s revenues and earnings.
Array represents a “skate to where the puck will be” investment. Expanding internationally will reduce their reliance on U.S. solar growth which is subject to regulatory risk, along with their reliance on a small set of key customers. Should they develop a viable recurring revenue business model, they’ll be at less risk if new solar project growth slows in any country they operate. While it’s impressive what they’ve accomplished so far, we won’t start liking the stock until they’ve made some progress executing on their master plan.
In addition to holding shares of the only solar ETF out there, one of our oldest stock holdings is the largest renewable energy company in the world. It’s just some of the information you’ll find in The Nanalyze Disruptive Tech Portfolio Report.
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