Array Technologies stock analysis: can the solar tracker giant recover to continue energizing the solar industry?
Array Technologies is a crucial part of the global solar energy project value chain. The US company is the second-largest supplier of solar tracker systems worldwide. Array had a place in the sun after it went public in October 2020 and delivered solid profits throughout 2020. But the supply chain disruptions following the post-COVID recovery first slashed revenues and in a second wave shot up material costs and left the company in the red. The consequence: the company is still burning cash and the stock price crumbled.
The company is accordingly on the ground, even if the first rays of hope appear: The pandemic is not over, but Array had a capital infusion from Blackstone, acquired a competitor, and has taken measures to increase margins.
Nevertheless, the Array share remains primarily a bet on whether Array will find its way back to its old strength or whether it might not survive this crisis.
But that is exactly the reason why the Array share could be interesting: the turnaround.
With decreasing costs and fewer delays in shipping, the stock could also rise again. The stock is currently valued at around 1.6x Array’s sales, which is a quarter of the price-sales ratio one year ago.
So let’s find out whether an investment could currently be worthwhile. Is the Array share too expensive? Or should one buy Array shares right now? I try to approach these questions.
You will find out how the business model works and how good it is, how solvent Array is, what the current strategy looks like, what the opportunities are and where the risks lie. Have fun!
Table of Contents
Table of Contents
Let’s first get an overview of the company and understand why Array is a Pure Climate Stock.
Array Technologies (NASDAQ: ARRY) is a leading American company and global provider of utility-scale solar tracker technology. Trackers help maximize the energy production of solar power projects.
The company started in 1989 as the world’s first solar tracking manufacturer. It was consolidated as Array Technologies, Inc. in 1992, and obtained the industry’s first solar tracker patent 2 years later.
With the very recent acquisition of its competitor STI Norland, it became a global player and it is currently estimated to service around 22 GW of installed solar capacity.
Since 2018, the CEO is Jim Fusaro. Array went public in the USA in October 2020 with an initial share price of $22.
In solar power projects, photovoltaic (PV) panels convert sunlight into electricity. Array Technologies, Inc. is one of the world’s largest manufacturers of ground-mounting tracker systems. They are an integrated system of steel supports, electric motors, gearboxes, and electronic controllers that move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases electricity production.
Besides manufacturing solar trackers, Array provides engineering services to customize their installation for each site as well as project management services that include on-site support for installation and commissioning. Array also sells software with a machine learning algorithm that can help a solar project yield more electricity production, according to company information.
Array claims it has an industry-leading design that is verified by an unparalleled track record of excellent performance, zero scheduled maintenance, and a 30-years lifetime.
Size and valuation
Array by market share and market capitalization is one of the largest solar tracker manufacturers in the world. It has a market value of $1.335 billion.
Why is Array a Pure Climate Stock?
Array is an important player in the solar power value chain. A third-party review of real solar projects using trackers has shown that using a single-axis tracker leads to gains in electricity yields of 10-25% and that the projects require around 33% less occupied space for the same electricity output.
By allowing solar power projects to generate significantly more power and allowing solar sites to be built in difficult terrain while reducing the physical footprint, the companies’ trackers are a crucial technology to use earth’s resources more efficiently and make solar energy more competitive.
Since Array’s technology is improving the economic attractiveness of solar power projects compared to fossil-fuel-based power generation, it is a Pure Climate Stock.
Share price development
Since its IPO in October 2020, Array Technologies’ stock price rocketed from the initial $22 in only three months to an all-time high of $54 in January 2021. A year later the price has fallen by more than a staggering 75% to $9.97. The reasons for the stock nosedive are bad news for investors across the last three quarterly results: crumbling profits due to cost increases, dilution of shareholders, and allegations of misinformation in the pre-IPO phase.
Source: Bloomberg (2022);
Unless otherwise stated, all figures are USD and trailing twelve months (TTM). Addition ‘(e)’ = expected in the current year.
- Market Capitalization: $1,335 million
- Revenue: $821.36 million
Capacity of solar power projects serviced: 22,000 megawatts
- Profit: -$25.5
- Free cash flow: -$64.50
- Country: US
- P/S ratio: 1.62
P/E ratio (excluding extra items, annual): -33.27
- P/CF ratio: –
- PEG ratio: –
Growth & debt
- D/E ratio: 125%
- Gross margin: 14.05%
- Revenue growth (from 2019-2021): 16.5% p.a.
5 Facts about Array Technologies
Since the recent acquisition of STI Norland, Array is the second-largest global solar tracker producer by sales.
The company has helped more than 900 projects supply over 22,000 MW of energy globally.
Average sales growth was around 16% from 2019 to 2021.
Array ended Q3 2021 with a net profit of -$25 and a free cash flow of
Stock price fell 75.8% YoY amidst increasing steel and logistic prices and dilution of shareholders due to STI Norland acquisition.
Let’s look at Array’s business model and strategy in more detail:
How strong is the sales growth?
Sales have grown by around 16% over the past 3 years:
2019: $648 million
- 2020: $873 million (+ 34%)
- 2021: $858 million (estimated) (-2%)
The numbers show that 2021 was a difficult year for Array. In Q3 2021 orders for trackers were up 35% versus the same time last year which demonstrates the growth in the sector. Array now has an order book worth $1 billion. But, Array cannot turn the orders into cash. The reasons are delays in shipments of material and freight bottlenecks. Coupled with increases in raw materials and logistics costs, this results in negative earnings and cash flow for the end of Q3 2021.
Array by far makes most of its sales in the US (92%), Australia (5%), and 3% in the rest of the world.
In January 2022, Array Technologies completed the acquisition of Spanish tracker manufacturer Soluciones Técnicas Integrales Norland (STI Norland). Array bought a 100% stake in STI for roughly $652 million at the time of deal-making ($401 million in cash and 13.9 million shares of Array common stock). STI Norland is a leading solar tracker provider in Spain and Latin America. In 2020, the company generated a revenue of €200 million (a growth of 34% on an annual basis) and negligible profits. Based on these figures, the P/S ratio of STI Norland in the deal was 3.2, which is significantly higher than Array’s current P/S ratio of 1.62. This is a high valuation for STI Norland relative to Array.
Array said this deal makes it the “largest solar tracker company in the world”, but this is based on 2020 order bookings, not sales.
What is the business model and strategy?
Aggressive growth strategy
Array follows a growth and diversification strategy. It mainly aims to:
- expand into new geographies,
- develop complementary product categories,
- innovate business processes
The takeover of STI Norland was a big move for Array in this direction. It establishes the company as one of the largest solar tracker companies in the world, leading to an estimated 200 million in adjusted EBITDA. The acquisition will strengthen Array’s supply chain networks, with manufacturing capacity and design and engineering resources on three continents. It will also aid in expanding its customer base into key markets such as Brazil and Europe and provide entry into new markets in the Middle East and Africa. But, the acquisition was costly.
The deal with Blackstone and STI Norland
Array needed cash for continuing the business amidst negative cash flows and for buying STI Norland. Blackstone, one of the largest investment firms in the world, was ready to make a deal with Array. It agreed to purchase $500 million worth of newly issued stocks from Array which flooded Array with money. But for those that were invested before the transaction, the deal had two big disadvantages. First, investors’ shares were diluted by 8%. Second, expected cash flows needed to be revised downwards as Blackstone is entitled to a dividend rate of 5.75%. This translates into around $20 million every year that weighs heavily on the cash flow and will delay or decrease dividend payments for existing investors.
Also, the deal with STI Norland had short-term negative consequences on shareholders. Owners of STI Norland not only receive cash but also newly issued shares of Array Technologies. The effect is another 10% dilution of existing shareholders.
By now, Array accumulated more debt than equity (ratio of 125%) and has a larger enterprise value (EV) than market capitalization. For 2021 estimations show that debt will be significantly higher than 4x the EBIT, which is a warning signal.
Now, Array has to show that it can turn market share into revenue, increase profits significantly to prevent liquidity problems, and make the acquisition worth the while for investors.
Let’s see what the chances are for Array for achieving that?
How does the company make money?
Array Technologies is one of the leaders in the solar tracker market. It obtains revenue from selling, installing, and servicing its solar trackers and its accompanying energy yield optimization software. Unfortunately, there is no information on the revenue share between the products and activities.
Array offers two product ranges. Their horizontal, single-axis solar tracker, DuraTrack® HZ has been optimized over decades. It is often coupled with SmartTrack™, a machine learning software that boosts energy production equipped with trackers.
Area of application of solar trackers
Put simply, the profitability of a solar energy plant equals the revenue from electricity sales minus the levelized cost of electricity (LCOE) generation. Trackers represent between 10% and 15% of the cost of constructing a ground-mounted solar energy project. Hence, trackers are an investment that only pays off for large solar energy projects and Array’s tracking systems are mostly utilized for utility-scale solar projects with more than 5MW installed capacity. For orientation, plants of that size can power thousands of homes with solar electricity. Utility-scale projects that use trackers deliver electricity at around 10-12% lower costs than projects that use fixed mounting systems. That is why by now 70% of all ground-mounted solar projects constructed in the U.S. utilize trackers.
Deep Dive: Mechanisms of the Business Model
The solar trackers market is growing, but will Array be able to leverage the acquisition of STI Norland and improve its management of raw material and freight costs? Does it have a strong enough moat and economies of scale to increase its profitability?
Array goals for 2022
Every business lives from its margins. Manufacturing companies traditionally have lower margins compared to technology companies that can build a moat around their business (e.g. Microsoft, Google, or Amazon). But, last quarter’s margins of Array have been worryingly low and eroding quarter by quarter.
As shown in the figure below the gross margin is currently 4.8% for Q3 2021, a significant decrease from the 19.2% margin from the same quarter last year.
Lawyers on behalf of shareholders even filed a lawsuit against Array claiming that the company failed to adequately disclose the existing rise of costs related to certain supplies in the pre-IPO phase.
Array plans to significantly improve its gross margin during the coming quarters. The company says that it expects to achieve a turnaround in gross margins. During the second quarter, Array changed the business process to allow for margin increase amidst rising input prices. First, customers only receive a fixed price offer with a short validity period. If material prices move up, Array requotes the project using updated costs. Second, Array is asking customers to make a deposit which enables Array to buy basic materials and components for the trackers. Third, Array leverages its strong US-based supply chain and has entered favourable new contracts with steel producers Nucor and POSCO protecting Array against price fluctuation.
As a result of these measures, Array expects gross margins to improve steadily over the next several quarters as new, higher-margin orders constitute a larger and larger proportion of Array’s project pipeline.
The acquisition of STI Norland will accelerate Array’s international expansion and growth. According to their CEO, STI Norland has higher margins that across the new business will help raise profitability. Additionally, the company after the acquisition has an increased purchase power due to higher order volumes.
Evaluation of the Business Model
Are there network effects accelerating the sales of Array? No, buyers of Array’s products do not benefit when other solar PV projects also use Array’s solar trackers.
Does Array generate recurring sales with lock-in effects?
Array sells its products to engineering, procurement, and construction firms (“EPCs”) that build solar energy projects and to large solar developers, independent power producers, and utilities, often under master supply agreements or multi-year procurement contracts. Therefore, to some degree, a lock-in effect does exist for buyers of Array’s products.
What methods of economies of scale does Array apply?
The overall goal of Array is to increase profitability while maintaining its leadership position within solar tracker technology quality. The main focus of the operating business model is to reduce costs and increase revenues. With an increased market reach and higher production numbers and purchasing volumes, further cost digressions seem feasible.
Has Array embraced proprietary technology mechanisms?
Array’s trackers use a patented design that allows one motor to drive multiple rows of solar panels. To avoid infringing on their U.S. patent, competitors must use designs that Array believes are inherently less efficient and reliable. Therefore, Array believes their products have greater reliability, lower installation costs, reduced maintenance requirements, and competitive manufacturing costs. Their core U.S. patent on a linked-row, rotating gear drive system does not expire until February 5, 2030. Array claims that recent studies have shown that the DuraTrack model lowers tracking costs by 7% to the nearest competitor, giving Array a technological advantage.
What are Array’s market branding strategies?
Array markets its trackers as best performers, but so does the competition. Brand value is a differentiator in the industry, but I mostly see it originating from the high market share of Array.
Array seeks to become the global market leader in solar trackers through the acquisition of STI Norland. It also expects to fully recover and have its gross margins surpass prior maximum levels. In my opinion, Array does not have a significant moat. Nevertheless, economies of scale are possible, particularly with this new expansion of its supply chain and increased purchasing power. It remains to be seen if the new business processes will allow passing through cost increases to customers while keeping order volume high.
Market size and competitors
Solar tracker shipments reached new record levels in 2019 with shipments exceeding tracker for 31GW of solar energy projects globally; an increase of 55 percent year on year. Exceptional demand in the United States as well as strong development in other markets like Brazil, Mexico, Chile, Spain, and Australia helped propel shipments to new heights.
The global solar tracker market size was estimated at $2.3 billion in 2019, reaching around $3.0 billion in 2020, and further on, it is expected to witness a compound annual growth rate (CAGR) of 29.5% and reach $11.0 billion by 2025.
Source: IHS Markit (2022)
The tracker market has a large number of players. Competitors of Array include NEXTracker, Inc. (biggest competitor in the US), FTC, Nevados, Soltec, PV Hardware, Artech Solar, NClave, and Powerway Renewable Energy Co. Ltd, among others.
As can be seen, Array Technologies is just behind NEXTracker in terms of market share, although with the acquisition of STI Norland this might change since this will also give Array leadership in Brazil, one of the top growing markets.
FTC Solar which is publicly listed and where information is publicly available has 11% of the US market. Here is how FTC compares with Array in numbers:
The numbers suggest that FTC seems to be struggling even more than Array in this challenging global economic environment. Relative to revenue FTC is performing worse than Array in net income, operating margin, and free cash flow. Although this is a momentary snapshot, Array seems to be in a position of relative strength here.
Drivers and outlook for solar trackers market
Are government subsidies for solar projects still needed for fast growth?
The market for solar trackers naturally follows the market development of solar projects. What does it look like? And is solar market development negatively impacted, if the government removes instruments for supporting solar projects?
The cost of building new solar power plants has been falling worldwide in an unprecedented way. Just a few years back, however, the cost of electricity generation from solar was considerably more expensive than coal-fired electricity, for example. Investments in solar energy relied heavily on the support of state subsidies. Public schemes like auctioned feed-in tariffs, helped these immature technologies to achieve their breakthrough. Some projects do not even rely on such support any longer. This is prompting policymakers to consider phasing out support mechanisms. But, a recent study shows that for Germany discontinuing auctions would slow the growth of solar power by 35%. What this is pointing to is that solar energy projects are competitive in the market and that the market can grow without subsidies. But to achieve maximum possible growth continued governmental support is needed. For the US market, where Array conducts most of its business, this means that the tracker market will get an extra boost if the Build Back Better Act (BBB) passes Senate early this year. But the market can be expected to also grow significantly if it doesn’t.
In any case, and particularly, if subsidies go down, trackers will be of vital importance for utility-scale projects because they lower electricity generation costs.
Is one technology better than the other?
Array has a technology of linked rows with one motor (single-axis tracker) and claims that this design with fewer components, offers more flexibility, reliability, and lower installation and maintenance costs than other systems. NEXTracker also uses single-axis trackers but with two separate motors and controllers and claims that the market is moving towards this type of unlinked independent rows. Both, Array and NEXTracker have contested each other’s claims of superiority. It seems unrealistic to assume that one technology is significantly better than the other given that both are successful in the market. It seems more realistic to assume that both systems are more or less equally reliable. The question of which system leads to more cost-effective electricity generation will need to be answered for each specific solar project and will depend for example on the location and the angle to the sun.
In single-axis trackers, the rotation is done on a single axis, which can be horizontal, vertical, or oblique. But there are also some companies offering dual-axis. They can follow the elevation angle of the sun, thus achieving full tracking and allowing more energy capture. But there are some disadvantages associated with dual-tracking. The tracker has higher technical complexity, which makes it potentially vulnerable to failures. They are mostly used where solar efficiency needs to be optimised or terrain is difficult.
Source: Valdoreix Greenpower (2022)
In 2019, single-axis trackers worldwide held the largest share of 52.8%, while dual-axis trackers covered the rest. Grandviewresearch expects dual-axis trackers to outperform single-axis trackers in terms of market growth until 2025, but also growth rates for single-axis systems are projected to be on a high level.
The single-axis tracker market growth projection seems to be significantly high in order for Array to stay in this part of the market. It will be interesting to see, if over time Array will branch out into the dual-axis tracker market as well.
Let’s explore the strengths, weaknesses, opportunities, and threats of Array’s current business model.
- Demand remains at record levels. Over $1 billion in orders for the first time in the company’s history.
- Strong market position in the US. Strong growth potential on the back of the US solar energy industry as solar has become the most competitive source of generation in the US, with or without incentives.
- Industry leadership with a proven product and patented technology until 2030.
- Steel supply deals with Nucor and POSCO help to recover margins.
- The business model remains highly vulnerable to high material prices and logistics interruptions that could negatively impact profit margins in the future, although the company has taken countermeasures.
- Manufacturing has always been capital intensive and has fairly low margins. Array has a strong market position and some patent protection. But there is always cost pressure from the competition.
- CEO Jim Fusaro announced his leave at the end of the year. A change in CEO carries usually downside risk as the newcomer might shift corporate strategy for the worse.
- The company seems to have lost investor confidence after having diluted shareholders considerably in 2021. It will take some time for investors to establish trust in the stock again.
- Benefits from STI Norland merger in terms of combined purchasing, creating opportunities for cost savings.
- Strong growth in non-US markets, particularly Brazil, thanks to the STI Norland acquisition.
- Legacy orders will constitute fewer and fewer of their shipments, which should result in higher gross margins, creating a strong turnaround for Array
- If the Build Back Better package passes US Senate, customers benefit from additional incentives if they buy an Array tracker because its components are mostly manufactured in the US.
- Financially Array is in a challenging situation. The debt-equity ratio is high and Array is generating negative cash flows. If margins cannot be increased and projects continue to be delayed due to logistical constraints, Array could have issues with its solvency.
- The product range of Array is focused on the single-axis tracker. If there is a growing trend towards dual-axis trackers, this could slow the growth potential of Array in the long term.
- As long as the lawsuit against Array is ongoing there is a risk that the company will need to pay compensation to shareholders if the lawsuit is successful. It is interesting to note that the lawsuit was filed before the Blackstone deal and Blackstone legal experts will have looked deeply into the matter. As the deal went ahead the lawsuit probably has a very low likelihood of passing.
Calculating the fair value of any business is always a challenge and several assumptions about the future need to be made. However, we now have a comprehensive overview of Array. So, let’s take a look at the stock, compare quality and valuation and then draw a conclusion.
The fair value of the share
For determination of the fair value I made the following assumptions of a period of 10 years:
My valuation model works with growth estimates for 2022-2026 (short-term) and 2027-2031 (long-term). This is how I determined growth for the two periods:
Revenue development in the last two years was a rollercoaster. The increase from 2109 to 2020 was 34% and it fell to -1% in 2021 when the post-Covid recovery disrupted supply chains.
Current analyst expectations: + 60% for 2022 compared to the estimate for 2021, which seems very optimistic. Market experts project an annual growth of the solar tracker market of around 30% until 2025.
My short-term assumption for Array: I am assuming 15% growth due to continued supply-chain disruptions post-Covid in the next 1-2 years.
My long-term assumption for Array: 20% sales growth per year. Governments around the world have ambitious solar expansion plans for the coming decades. Any growth in solar capacity that is hampered in the coming years will need to be made up afterward.
The net margin fell from 18% to 5% in the last three quarters reported. A long-term net profit margin in the industry is 7%. Array estimates margins to go back to around 15% on average for 2022. Despite the high demand for solar trackers in the solar energy industry and the proven ability of Array to achieve beyond average margins, I conservatively assume it to be at 10% in the long term.
Today the stock is valued at a negative P/E. I assume that the share, based on the other assumptions, will be valued at an average P/E ratio of 20.
My return expectation
According to the yield calculator, the stock looks significantly undervalued at the moment. But this is under the assumption that Post-Covid recovery challenges reside and Array manages to achieve revenue growth and margins similar to the year 2020. If this is the case, I see the potential for yielding multiple times the investment in the long term.
- Turnaround opportunity: In the event of a recovery, direct price gains beckon thanks to the favourable valuation level.
- Crisis as an opportunity: Array is forced to rethink processes and structures that could be helpful for the future.
- Position as one of the largest tracker manufacturers in a growing market should provide a comparative advantage.
- High risks due to challenging financial situation and ongoing post-covid recovery problems.
- Manufacturing is capital intensive and has fairly low margins. There is always cost pressure from the competition.
- It will take some time for investors to establish trust in the stock again, which might weigh on the stock price for some time.
Array is active in a trending market that is expected to boom over the next decades. The acquisition of STI Norland provides the opportunity for Array to benefit from market growth on an increased scale. Although the company is one of the leaders in solar tracking technology, it will not be easy for the company to differentiate its products from those of the competition. This could bear down the margin in the future, even when material prices will have stabilized. It remains to be seen if the old net margins of around 18% will return. In my personal view, the stock offers an interesting turnaround opportunity and a good risk-return profile at the current price level. That is why I bought some stocks in Array recently. I am willing to buy more, in case Array achieves a consistent growth in margins over the next quarters.
In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.