Introducing Nextracker (NXT)

It’s definitely going to be lumpy on revenue and earnings because of the nature of the business which is to get large contracts at times they cannot predict. There’s also no subscription element to their product, so some customers are probably one and done for a solar plant that is built by an engineering firm.

Keep in mind the quarter you are referring to with 513M of revenue is the quarter they first went public in I believe of February 2023. The prior quarter to that with 338M revenue they were still a business line of the company Flex. It makes it a lot harder to compare because we don’t know how much Nextracker was operating independently by then.

They had some adjustments (including a big one from tax credits helping them in Q4), so the adj EBITDA was:

84 → 110 → 168 → 160

Yep, I picked up after my first post that the bump in net income and EBITDA was from a one time event. It looked like that on first impression because it doesn’t look like a natural acceleration even for a company crushing it. The current quarter is not a blowout after you factor in these changes. Although I do think management sounds very optimistic this past quarter, and the new CFO as well.

A little flatter, and Q4 actually took a step back rather than exploding higher. And in the call they discussed how their adjusted Gross Margin was 30% in Q3 and Q4, but that they’d be lowering prices and even with the tax credits they only expect a high-20’s GM this coming year. They talked about expected pricing pressure.

It doesn’t seem that much off to me if gross margins are going from 29.5% and 29.7% down to “high 20s”. Sounds like they expect some deceleration here in the margin. There’s plenty of reasonable reasons where they could expect gross margin to slightly decrease like steel prices.

They’ve mention in the solar trackers space there are basically five competitors, and how this is a very different contrast from the solar panels space where there are tons of players. I like that there’s only five companies to go up against and out innovate. Pricing pressures can also work in Nextracker’s favor if they can use their global supply chain and scale, especially if a competitor cannot stay competitive because of pricing. I don’t think it will be a winner take all market, but if Nextracker is able to eliminate any of those five competitors it will be a big deal for them.

That is awesome news for volumes, but I think they’ve probably already seen some of this included in Q4 (ending March) revenue, and probably Q3 (Q ending December) too…installer customers buying stuff in Oct-Dec that would be actually installed in 2024

What sign is there that growth will be slowing in 2025? Just taking the growth from 18.4 → 36.4 in one year means that Nextracker’s market doubled. Since all the utility level plants use a tracker, they are going from getting .3 * 18.4 to now getting .3 * 36.4. I’m not too concerned if these quarters were booked last year or in this current quarter too much.

The market for solar is growing so rapidly now, most of the predictions are big underestimates. It’s basically well known in the solar industry currently that the aggressive projections for solar in place are sandbagging on what the actual numbers will land at. Since the unit economics of solar have improved so much over the past few years, it’s now becoming one of the most efficient, and the greenest of all energy available to build.

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Huh? Whether you’re talking about NXT’s f2025 (this year) or solar in calendar 2025 next year, I don’t think growth will be slowing! What did I say that sounded like that?

I just don’t see evidence of that. They guided for 2.3b in their initial guide for f2024. By q3 they had raised it to 2.475b. The actual was 2.5b. They beat the initial guide by 9%.

For f2025, they just gave the initial guide of 2.9b. Let’s say they beat it by 18% – twice as much as last year. That would put them at 3.42b for the year, about 37% growth. I think that could be possible, but I think it’s on the rosy side.

If they keep the impressive 21% ebitda margin that’s around 715m (vs the 521m last year). If the market gives them the same multiple the stock would be up ~40% (as I mentioned, similar to revenue).

From the things you’re saying it sounds like maybe you expect even more? What do you think they could do in f2025?

Bear

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Sounds like I may have misunderstood your point. I thought what you were getting at is that some of the orders for calendar year 2024 are already booked or in the backlog so that’s already accounted for. From the article,

EIA’s 36.4 GW projection of utility-scale solar nearly doubles last year’s 18.4 GW increase, which was already a new deployment record.

I believe this means the market Nextracker is serving is projected to double in calendar year 2024. The existing EIA predictions while forecasting aggressive growth still have been underestimates on basically every metric.

I just don’t see evidence of that.

You don’t see any evidence of the predictions for the solar industry being underestimates? The management is talking about this topic a lot and has given examples for both recent forecasts and decade old forecasts which were significant underestimates.

From the things you’re saying it sounds like maybe you expect even more? What do you think they could do in f2025?

My overall thesis is that industrial grade solar has crossed over a tipping point in terms of price, wattage, and physical space needed. Crossing over this point has made it so other forms of energy are less attractive, and incentives seem aligned worldwide to continue the trend towards solar.

I don’t think I have enough information to forecast revenue because so much of that depends on the overall solar industry. If there weren’t industry tailwinds and the consensus was the market will grow gradually and consistently then I probably wouldn’t be investing here.

That’s a good point about the fiscal 2024 numbers being only a 9% beat after having projected 2.3B and landing at 2.5B. That does make me wonder why they are not beating those numbers by more, although the yearly grow rate was still 31%. Trying to reconcile how projected utility scale solar would double by wattage, but have Nextracker beat by 37% if they land at 3.42B ahead of estimates. The 2.9B guide seems extremely conservative to me as that is below this quarter’s currently run rate for revenue.

I do like that the P/E for this company is 15, and that little growth is expected of them. It seems to me like this management team is playing the beat/raise game well as they’ve done that all quarters are a public company. The next quarter results should give a lot of indication if my thesis is playing out correctly or not.


I thought this infographic was useful from that story linked above because it shows the wide geographic distribution of the new solar plants going in. The story says Texas is going to account for 35% of the USA’s utility level solar for 2024. I think there may eventually be a domino effect where when other states, and countries see the results of solar, they will want to replicate and go for green, efficient energy.

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I have entered a small position in NXT based on company and sector growth, but expect the holding may be short lived. My concern is NXT will be squeezed as there seems to be very limited technological protection from aggressive competition.

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Thought I would share more about why Array has been losing market share to NXT and my overall thoughts on NXT.

In the Q2 2023 call, they said that their flagship product was not ideal for all projects and they’ve had to discount them in order to compete.

"As we operate today, we only have one tracker to provide our domestic customers, DuraTrack. This industry-leading tracker platform will continue to be our patent-protected flagship product.

However, it is not the most ideal technology for all projects. For example, severely undulating terrain, or mild weather conditions.

For projects with these characteristics, currently, we would have to lower the price of our flagship product, therein diluting our value proposition to compete with other offerings in these rapidly growing segments.

In the past, we may have selectively chosen to do so, which has created more inconsistent results because the range of margins on individual projects can be wide.

However, more recently, with the introduction of OmniTrack, our terrain flexible tracker and the STI H250, our lower cost tracker, we have not been willing to take that route, and we have maintained pricing discipline on our DuraTrack product to protect the value it offers."

They only launched their terrain track technology mid-2023 while NXT’s terrain tech was launched in 2019.

They have been similarly slow in launching hail protection technology. They launched a solution in Q1 2024 (just last quarter) while NXT’s solution was introduced in 2021.

Overall, they are years behind in innovation and one can understand why clients are choosing NXT (quality over price).

Overall thoughts on NXT

I really like the company because of

  • the tailwinds in the sector (forecasted over 20% CAGR for the solar industry over the next 5 years)
  • its great financial performance thus far
  • cheap valuation (roughly 14x this year’s projected earnings)

However, there are reasons that make it a small allocation in my portfolio

  • pricing pressure may mean that earnings growth only keeps up with revenue growth at best. I don’t like that the company is guiding for 16% revenue growth this year but only 1% NON-GAAP EPS growth. They are probably sandbagging both, but the difference is stark.
  • they provide hardware to EPC companies and revenue can be lumpy for these project-based contracts. Any delay in project timing due to supply constraints, financing availability, etc. (as Array is facing now) can exacerbate this lumpiness. Wall Street doesn’t like this lumpiness and neither do I.

My plan is to exit once there are signs of project delays or when valuation becomes richer (hopefully through price appreciation).

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I just noticed that a year ago they said:

Backlog grew to a record $2.6 billion, a 90% year-on-year increase

So the backlog growth was 90% in f2023 and down to 50% in f2024.

I only point this out because energy is typically a cyclical industry, and has been even as solar has grown spectacularly over the last few decades.

The tailwinds aren’t new, and while the performance is still good, it’s slowing. Weirdly with cyclicals, the most dangerous time to buy them is when everything is rocking and the PE is low. That’s usually toward the end of the cycle. I have no idea if this is the case here so I leave it an open question:

Is NXT a cyclical company/stock? Why or why not?

Also, if it is cyclical, there might be crucial metrics to watch besides just revenue growth and profits. Backlog? Other?

Bear

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In the past I would argue that solar stocks were cyclical but I don’t believe they are for two main reasons. The first is the cost of Solar has come down so much.

Power Source Cost per kWh (2024) Cost per MWh (2024)
Solar $0.03 to $0.06 $30 to $60
Wind $0.03 to $0.06 $30 to $60
Natural Gas (CCGT) $0.05 to $0.08 $50 to $80
Natural Gas (Simple Cycle) $0.09 to $0.14 $90 to $140
Coal $0.06 to $0.12 $60 to $120
Hydro $0.03 to $0.07 $30 to $70
Geothermal $0.05 to $0.10 $45 to $95
Nuclear $0.11 to $0.18 $110 to $180

The second reason is power demand is only increasing. So we need to build power plants and Solar power plants are at the top for cheapest sources of electricity. I think you will see a decline in coal, gas power plants being built and see that taken by new solar power plants. You also have all the power plants that are reaching the end of their life that will also need to be replaced. Solar was cyclical before because it only made sense when it was done for PR reasons or if the subsidies made sense. But without subsidies it makes sense economical sense now.

I do think solar will probably reach a steady state cyclical nature just like all other power plant production has reached but I don’t think that time is now or within the next 5 years.

For the cyclical nature I would watch power demand vs production capacity.

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Independent of whether Nextracker or any other solar supplier is a great investment, I would like to take a look in to the future and some “opportunities” that await any mass solar deployment.

There have been several statements about the future of solar industry that are misleading.
Solar and wind power will not be a prudent replacement for natural gas, coal, hydro, geothermal or nuclear power plants. The reasons for this statement are below.

The grid, we take for granted, supplies nominal voltage and frequency by balancing the generation with the load. If there is excess generation, the voltage will rise and frequency will increase. Vice versa, with excess load, the voltage is fall and the frequency will drop. The grid operator will determine the amount of generation that is on line by bringing on or terminating generation as required to bring load and generation in balance.

To achieve this, the generation must be a dispatchable source, meaning it will supply specified amount of kWs for time certain. For example, the grid operator requires 1000kW for 2 hours to balance the grid. The power sources listed drew1618t, are dispatchable except Solar and Wind. To make solar and wind dispatchable, they require energy storage in some form. It is to the benefit of solar to have storage because the solar array can operate at peak power and store excess energy that is not provided to the grid/load. The excess energy can be used when the sunlight is insufficient for the need.

In my estimation, any deployment of solar and wind without storage above 20% of total generation, will have a destabilizing influence on the grid. If the sun is blocked briefly, the output from the array will be diminished causing the voltage and frequency to drop. Such a drop may cause the system operator to respond for more generation only to have the sun shine again causing the voltage and frequency to rise, precipitate further actions by the grid operator.

Additionally, the deployment of solar requires an inverter interface (DC to AC) to couple the solar array synchronously to the grid. The amount of fault current delivered from the inverter will be limited as to protect the semiconductors.

In contrast, the plants powered by natural gas, coal, hydro, geothermal and nuclear are turning massive generators operating synchronously with the grid. The huge rotation mass provides enormous fault clearing capability and huge step load response that are not available by inverter coupled energy sources.

If the solar plants proliferate and replace the retiring power plants, I expect we will have many more issues to resolve as the grid becomes less robust.

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It would probably be helpful for us to define what it means to be cyclical a bit more. My understanding is that a cyclical stock is one that is unusually dependent on economic cycles. Some more obvious examples are automotive and housing which depend on consumers being able to purchase. Interest rates are also likely to impact a cyclical stock more than others.

I was querying with AI asking if Nextracker was cyclical and got the answer that it is. I was also asking if Supermicro is cyclical and it said it’s mostly cyclical. Diving a bit deeper and asking what makes Supermicro not as cyclical it said that long term growth trends in data center make it less cyclical. Basically, an industry tailwind does turn a cyclical stock into one that’s less cyclical if the tide is rising in that industry. Because the industry is rising it makes the companies in that industry less impacted by an economic downturn.

Weirdly with cyclicals, the most dangerous time to buy them is when everything is rocking and the PE is low. That’s usually toward the end of the cycle.

This was the case with Supermicro about a year and half ago where it was considered a cyclical by the investment community with a P/E between 10-15. The company started accelerating it’s business to get out of being cyclical but the market took little notice at first. Now that it has increased it’s sales dramatically, the market simultaneously reevaluated the company to be a growth company and now trades for a trailing P/E of 50. If a similar situation happens to Nextracker it has the chance to rise significantly.


In the initial write up I was emphasizing the industry tailwinds, because my thesis in this company relies very heavily on this being true, especially compared to the other companies I’m investing in. By the definitions above it seems like if there is a large enough tailwind for the industry, the companies in that industry no longer act as a cyclical stock. This is what happened with AI/hardware companies over the last year.

Leading to the confirming the global industry tailwinds, there’s news out of China that their solar ambitions dwarf all the other countries by a dramatic amount. There’s a lot of useful information in this story from today, and one from a month ago.


https://www.pvtime.org/will-tracking-be-the-next-growth-point-for-chinas-pv-industry


From those articles we can gather,

  • China on track to have 1200 GW of solar and wind installed at end of 2024, six years ahead of government target
  • China building 2/3rds of all global solar and wind
  • China installed more solar between March of 2023 and March 2024 than it did in previous three years
  • In 2023 11B was invested in grid connected batteries by China, an increase of 364% over 2022
  • Arctech Solar is the main tracker competition in China with 8% of the market, revenue is growing 50%
  • Second article states that tracker market in China is only on 7-8% of plants right now (basically greenfield)
  • China focused on the solar panel production itself
  • In 2023 global renewable energy capacity additions increased “almost 50%”
  • Second article states, “Many solar related tech are suffering from the unstable market with exception of mounting and tracking providers”
  • Trackers require more innovation than typical silicon production for panels, barriers to entry include: algorithm design, AI, systems design (trackers are a high tech product)

It seems clear to me that whatever region we look at, the solar industry is growing massively which means it’s no longer in a cyclical trend. These are not small percentage increases, but enormous year over year increases in spend. It sounds like China is going to be the global leader in solar installations soon, and Dubai has the largest solar plant in the world. The average investor including institutions are probably still largely unaware that places like Dubai and China are going all-in on solar. That leads me to believe that Nextracker has a lot of potential upside.

I’m now trying to understand if Nextracker can sell into China. They have a office in Shanghai but the notoriously opaque Chinese markets are hard to get details on.

It seems like Arctech Solar, the biggest Chinese manufacturer of trackers may be the biggest competitive threat. They are listed at 8% of the market share of trackers while Nextracker has 30%. I’m guessing they are the low cost, less innovative option for a tracker, but it’s worth watching if Arctech market share creeps up soon. If it does, that could mean they are the main provider to Chinese solar companies. I’m not sure with the incredible scale China is operating at if Arctech is even capable to produce the amount of trackers needed, or if Nextracker can be in this market as well.

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The grid, we take for granted, supplies nominal voltage and frequency by balancing the generation with the load. If there is excess generation, the voltage will rise and frequency will increase. Vice versa, with excess load, the voltage is fall and the frequency will drop

To make solar and wind dispatchable, they require energy storage in some form.

In my estimation, any deployment of solar and wind without storage above 20% of total generation, will have a destabilizing influence on the grid.

Aren’t these considerations handled by batteries at the grid level? My understanding of why solar unit economics are so much better than other forms of energy is there are newer battery technologies, which take that excess energy and keep it for later in cases like you mention like low sunlight.

In the article posted above about China it mentions they invested 11B in grid connected batteries in 2023, a 364% increase over 2022 numbers. I believe most electrical companies are using the newer battery tech.

Do you have some sources which show that solar is making the grid less stable? Or that companies are struggling to implement newer battery tech for excess energy from solar?

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Based off my limited education into electrical engineering, their claims should not be possible, so I went looking for more information (BS in Physics). AC is used to transmit power because it can raise the voltage to lower the current. The reason this is valuable is because heat loss follows the equation P = I^2* R (I=amps, measure of current, R=resistance), lowering the current means less power is lost on the wires. Part of my quick digging revealed a reddit post talking about this and the top post had a short TLDR(Short Summary).

TLDR - This company is creating a bunch of BS internet fluff in an attempt to make them look like a legit brand for the sale of Low voltage DC HVAC and lighting systems. The claim of NASA involvement appears to be an outright lie on their part.”

Further digging shows a press release about this invoation and gives a link to the companies webpage. When clicking the link to the webpage I got nothing. When looking up ADC energy you find a completely different company than the one that created the PowerPoint and has nothing to do with the study.

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Grid level battery installations divorced from solar arrays are interesting. To me, it is on par with a standby generator with natural gas or other fueled engine. If we look closely to a grid connected battery divorced from the solar array, it is not the solar array charging it, it is the grid. Any source connected to the grid may be supplying the power to recharge the battery. This is because the power is fungible and may come from coal, natural gas, nuclear and solar generation source. You do not get to choose. Therefore, I view these grid connected batteries, not associated with a solar array, as buffer. Just as one might want to have a buffer to slowly charge from the utility but be able to supply high peek loads (perhaps a rapid car charger) so the utility demand changes are controlled and not excessive due to the peak charging load.

I my mind, the purpose of the battery associated with the solar array is to take excess array power and store it in the battery and when the array output is insufficient, supply the required energy to the grid. In my view, the grid does not charge the batteries associated with the solar array, however, it is a valid mode of operation. The battery/array is interfaced to the grid by electronic inverters and they have limited short circuit current capability.

Deployment of significant solar arrays results in variable power production by its nature and an undependable source. I do not have references talking about this phenomenon but any publication of this possibility would be not supportive of the green initiative. The proliferation of solar arrays, and batteries coupled to the grid by inverters sources seems to me that the grid will become less robust in the future. Robust fault clearing is a important part of a stable and reliable grid.

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