Shoals Technologies Shows Resilience In Q4 (NASDAQ: SHLS)

Stock Market


Engineer standing in solar power station looking sunrise

xijian / E + via Getty Images

Shoals (NASDAQ: SHLS) delivered Q4 and FY results after the bell last Thursday. Despite a miss on the bottom line, the market was pleased with what it saw and I believe that the reaction was justified. Shoals continues to see exceptionally strong demand for its EBOS solutions that only looks like it’s going to get stronger in FY22. Combine the exciting potential of Shoals ‘EV business and expansion into new regions, it’s hard not to see the opportunity in Shoals’ shares at this point in time.

Q4 Results

Shoals’ revenue came to $ 48 million for the final quarter of 2021, this was ahead of consensus expectations by $ 1.54 million. GAAP EPS was – $ 0.04 which was a miss of $ 0.06. This was primarily associated with a $ 1 million increase in material and logistic costs which helped squeeze gross margin to 33.1% from 38.3% the year prior. Shoals actually opted not to pass this expense onto customers to ensure strong long-term relationships remain intact, this is paramount for a company with such strong future growth prospects like Shoals. The company also continues to see a greater proportion of sales related to system solutions, which is where the company sells its full suite of EBOS solutions rather than just individual components – transitioning more clients to utilizing the full system is a goal for the company as it delivers stronger margins for the business

More importantly than the just top and bottom-line figures for the quarter was future guidance. Shoals is a high-growth company and after the stock price was hammered hard leading into the report, the market was predominantly focused on the future guidance and whether Shoals could maintain its strong anticipated future growth projections amid significant headwinds. The company delivered on this front, Revenue for the FY is expected to be $ 350 million with an adjusted net income of $ 69 million anticipated. This was slightly below consensus expectations, however still really strong. This would represent growth of 55% YoY in 2022. Based on this figure at current prices Shoals is trading on a forward P / E of 44, considering growth prospects and the huge international expansion potential (reinforced by the recently received EIC certification) – this valuation isn’t too unreasonable. The company expects to normalize to margins of between 38 and 40% by the back end of 2022.

Shoals’ future guidance is also reinforced by the company’s enormous backlog which was a record $ 299 million at the end of 2021 and is evidence of the continued strong demand that the renewable technology business is seeing for its differentiated products.

Outlook and EV Potential

Looking towards the sector as a whole. I believe that renewable and EV companies are looking solid as we move further into 2022. As a result of the Russia-Ukraine conflict, it appears that it is now more important than ever for western nations to start building energy independence. While the immediate focus may be on oil, taking a step back, the long-term renewable transition remains important and I believe that this conflict will force governments to push forward and invest with increased urgency into renewables – also directly benefiting EV-focused businesses.

Shoals provides investors with some of the greatest leverage to benefit from this. Not only does Shoals already sit on fantastic margins with great growth potential, the company also has significant untapped potential. This is particularly seen in Europe and the huge amount of customers who have not yet converted to the more innovative EBOS systems (which provide long-term cost savings and far greater system safety). Shoals is just at the start of its journey into the EV market, where the company can use its current expertise and apply it to another fast-growing sector. Shoals’ Total Addressable Market is huge and I do not believe the current market capitalization is reflecting that.

Risks

Predominant risks facing Shoals relate to current economic risks that face all growth stocks. The prospects of aggressive rate hikes are making a future recession increasing likely. Even as a bottom-up investor like myself, the uncertainty related to the fed trying to strike the balance between bringing inflation under control while also not inducing a recession is providing uncertainty and one thing the market hates is uncertainty.

However, in terms of future growth prospects, market risks are mitigated to a certain extent due to the huge backlog, which as mentioned previously reinforces the company’s significant growth guidance. This is further backed up by the opening of a new production facility, which is directly a result of increased demand for its EBOS solutions.

Conclusion

I believe the immediate jump in stock price following the results was justified and Shoals remains a company that the market still struggles to grasp and price efficiently. The significant drawdown in growth stocks has opened up attractive entries for growth investors and I think that Shoals remains one of those stocks. Even amid the turbulence, Shoals is a quality business worth buying and holding a stake in.



Source link

Leave a Reply

Your email address will not be published.