Array Applied sciences – A Solar Monitoring Inventory
Solar is finally having its day in the sun as the Invesco Solar ETF hit new highs, aided by the merger of Sunrun and Vivint who rose to the moon. The reason? Everything indicates that solar is the topic Robinhood daytrader types can pile into. Further evidence to support this claim could be Array Technologies (ARRY) recent IPO, which doubled on its first day of trading and now has a market cap of $ 5 billion. What everyone is so enthusiastic about is what is known as “solar tracking”.
The growth of solar tracking
In our previous article on how a solar panel tracking system works, we talked about how solid solar panels can produce a lot more energy when they rotate to track the sun. This is known as solar panel tracking. Solar energy projects that use trackers generate up to 25% more energy and deliver 22% less ldeveloped ceast Thef eEnergy (LCOE). Trackers are now widespread, at least in the US, where around 70% of all ground-mount solar projects built in 2019 used them. This is a great source of growth for Array Technologies, one of the world’s largest manufacturers of floor mounting systems for solar energy projects.
About Array Technologies Stock
Array Technologies was founded in 1989 and is the second largest supplier of solar tracking systems worldwide, with a 17% share of the world market. It is only behind the market leader Nextracker with a share of 30%. This emerges from an article by GTM that says Array is also investing in machine learning for its trackers, which are very different from competing trackers.
The foundation of Array’s competitive advantage is a patented design that allows a motor to drive multiple rows of solar panels through articulated drive joints. (U.S. Patent No. 8,459,249 – expires in 2030.) The largest competitor’s design requires one motor for each row of solar panels. As a result, Array products have higher reliability, lower installation costs, and lower maintenance requirements. An independent study found that projects using Array’s tracker system would achieve a 6.7% lower LCOE, 4.5% higher present value, and 31% lower O&M costs than projects using competing single-tier control architectures .
Customers are about to buy array trackers, sales of which more than doubled to nearly $ 650 million in 2019. This year they managed to achieve profitability.
Credit Array Technologies S-1 filing
The growth continues. Array Technologies had sales of $ 550 million in mid-2020. If they keep doing this, they will be well on their way to generating over $ 1 billion in revenue in 2020.
The cops thesis is obvious. Solar is lower than the cost of building new power plants that burn natural gas or coal, and the ESG types like to invest in solar projects. Solar tracking makes economic sense to use for new projects. The cost of tracking is 15% of the cost of a new solar project. So that’s a significant amount of revenue that needs to be recorded in advance. What we want to focus on are the risks.
Solar is a risky business
If you’ve invested in solar for a long time, you know that retail investors haven’t done well until last year. It’s hard to predict where the market is headed when technology changes so quickly. Regulations too.
We are risk averse investors who focus more on what could go wrong than what is right. In 2019, 87% of Array’s revenue came from the US, where 30% of total utility-scale solar energy capacity comes from its trackers. From 2014 to 2019, the annual installations of ground-mounted solar generating capacity in the US grew at an average annual growth rate of 20%.
Fueling this growth is the sun Iinvestment tAxe creturns (ITC), which grants a federal tax credit to developers of commercial solar projects. According to the current legal text, the tax credit expires over a period of four years from 2020 as follows: 30% for 2019, 26% for 2020, 22% for 2021 and 10% for 2022 or later. This diminishing incentive will result in slower growth, not to mention the great uncertainty surrounding the upcoming US election.
Outside of the US, where only around 30% of international solar energy projects used trackers, there is clearly room for growth, compared to around 70% in the US today. Outside of Murica, Array has to compete with the Chinese, who are quite experienced when it comes to solar projects.
Regardless of where Array does business, they need to adapt their business model to include recurring revenue instead of just project-based revenue.
It is easy to focus on the company’s tremendous revenue growth and look beyond the business model, which depends on “continued growth in the number of solar energy projects installed annually”. There is no recurring income here. Array makes money contracting out tracking systems to solar project developers with contracts ranging from days to months. Solar energy projects are expected to be in operation for at least 30 years and Array recognizes the opportunity to generate recurring income from these projects.
We believe that the significant and continued growth of our installed base will provide the opportunity to sell products, software and services related to our tracker systems. Our strategy is to roll out a targeted range of offerings over time, including hardware and software upgrades and retrofits, as well as preventive maintenance and extended warranty plans that we believe can generate high margins and recurring revenue.
Photo credit: Array Technologies
Array plans to expand into related products that are used in solar energy projects but are not currently being supplied through acquisition or organically. Implementing this plan can also help reduce the risk of sales concentration.
Focusing your revenue on one country is risky, as is a small number of customers who generate a large portion of the revenue. In 2019, Array’s largest customer and five largest customers represented 17.2% and 50.1% of total revenue, respectively. In 2019, two customers, Blattner Energy Inc. and EDF Renewables, accounted for 28.7% of sales (these were the only customers that accounted for more than 10% of total sales). The loss of a key customer could have a significant impact on the company’s sales and earnings.
Array is an investment where the puck goes where the puck will be. International expansion will reduce dependence on US solar growth, which is subject to regulatory risk, as well as dependence on a small number of key customers. Should they develop a viable business model for recurring income, they face less risk if the growth of new solar projects slows in a country they operate. While it’s impressive what they’ve achieved so far, we won’t like the stock until they have made some progress on executing their master plan.
One of our oldest holdings is not only the stock of the only solar ETF, but also the largest renewable energy company in the world. This is just some of the information you can find in The Nanalyze Disruptive Tech Portfolio Report.