Nextracker: Industry Positioning, Legislative Tailwinds Are Bullish Factors, Rate Buy

Investment Summary

Nextracker (NASDAQ:NXT) is an attractive play on solar tracking, offering an attractive risk/reward symmetry to participate in the cleantech thematic. NXT is a carve-out from Flex Ltd (FLEX) and listed on the NASDAQ earlier this year. The stock has plenty of institutional sponsorship, with almost 80% of the float owned by institutional investors and another 20% owned by PE/VC funds.

NXT provides solar tracker solutions and software for solar farms. Its footprint is in utility-scale and ground-mounted distributed generation solar projects. NXT’s offerings are designed to optimize solar panel performance by dynamically tracking modules in large-scale solar power installations. It books revenues by selling solar trackers and software products, so revenue growth depends on 3 factors, 1) maintaining and expanding market share, 2) the overall growth of the solar market, and 3) launching new products.

Despite listing this year, NXT actually has a strong track record, having led the global solar industry in gigawatts (“GW”) shipped from 2015—2022, and in the U.S. from 2016—2022. It delivered 18 GW in 2022, up from 12 GW three years ago. NXT has a network of 50 partners operating in 16 countries and has shipped a cumulative ~80 GW of solar tracker systems across 6 continents to date.

This report will unpack the latest investment updates and link this back to the broader buy thesis. Net-net, I rate NXT a buy, eyeing $53 as the next price objective.

Figure 1. NXT Price Evolution, March 2023—date

Risks to investment thesis:

Investors must recognize the following risks, in full, before reading any further:

1. A bulk of the buy thesis hinges on the tailwinds provided by the IRA and the subsequent tax credits to solar purveyors. Should this change, this would change the investment outlook.
2. A higher cost of capital, tight money, the inflation/rates axis—these are all macro-level factors that could clamp investment into the sector.
3. NXT is a new listing after its carve-out from FLEX, having only a short period of public market trading of its common equity. A bulk of the float is owned by institutions and private funds. This could impact liquidity of the stock in the secondary market.

These risks must be realized before proceeding to any investment decisions.

Critical facts underpinning bullish thesis

1. Industry growth levers

Two broad factors underpin the buy thesis presented here today:

• Regulatory tailwinds

When looking at large-scale solar investments in the U.S.—and for the rest of the world, for that matter—the investment thesis is robust, in my view. The Inflation Reduction Act (“IRA”) is a key tailwind adding to the economic mix here. Since the IRA was passed, there’s been another 52GW of new facilities due online by 2026, with ~16GW of this under construction as I write.

The market is also expected to triple in size, according to the Solar Energy Industries Association:

“Over the course of our five-year outlook, the US solar industry is expected to nearly triple in size. Between 2023 and 2028, the industry will add 236 GWdc to an installed base of 142 GWdc (as of year-end 2022). Solar will be the leading technology of the clean energy transition, thanks to the long-term policy certainty provided by the IRA”.

These estimates also bake in the 10% domestic content bonus provided under IRA. In fact, the IRA also provides for a 30% investment tax credit (“ITC”), which does not have any domestic content requirements. Per the Department of Energy: “Solar systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC”. The ITC has been a key tool in the government’s arsenal for the solar sector over many years. But the 30% ITC is now a critical factor for driving investment into solar power facilities. It was slated to reduce to the pre-IRA scheduled rate of 10%, but since the IRA was introduced, it has maintained the increase to 30%. This is extraordinarily significant in my view. The higher ITC rate is set to remain constant for at least ten years, and could thus be a significant driver for demand of NXT’s offerings.

• Tangible growth within sector

The SEIA also projects robust growth in solar installations over the coming 5 years. Forecasts put deployments at 29GWdc by the end of 2023, and c.263GWdc to be online by the end of 2028. This would bring the installed fleet to 377GWdc. In Q1 this year, the residential solar market added 30% of additional capacity, whereas commercial solar volumes were up 27% YoY. It projects 13% growth in commercial solar capacity by the end of 2024.

2. NXT Q2 FY’24 insights

NXT put up revenues of $480mm in Q2 FY’24, up 19% YoY, on core EBITDA of $84mm, a 160% YoY increase [note: as a reminder, NXT reported its 2nd quarter for its fiscal 2024. This corresponds with Q2 CY 2022. For consistency and simplicity, I’ll be talking in terms of Q2 FY’24 from hereon in, unless otherwise stated]. Its ex–U.S. segment was the biggest growth contributor, pulling in $209mm (44% is turnover) and growing 56% YoY. Whereas domestic sales were up ~350bps YoY to $270.4mm.

Given the momentum it’s garnered this YTD, management revised its FY’24 guidance by ~5% to $2.2Bn—$2.4Bn, calling for 21% YoY growth at the top. It is eyeing a revised EBITDA guidance range of $290mm—$340mm on this. Despite the Q2 trends, management still expects its U.S. business to make up ~60%—70% of FY’24 sales.

Figure 2.

Critically, NXT ended the quarter with a record backlog of over $3Bn. This was up from $2.6Bn at the end of its fiscal 2023. Management reports that ~80% of the company’s revenues are now recurring in nature, adding predictability to cash flows downstream.

I’d also point out the company is well capitalized on the liquidity front. NXT left the quarter with $355mm in cash, a surplus on its debt of >$200mm. It had access to total liquidity of $855mm by the end of Q2. The bulk of this ($500mm) is made up from an unused credit line of $500mm. NXT also completed a secondary offering of its common stock to the market rolling into Q3. This allowed its current shareholders (on the institutional side) to adjust their ownership, but more importantly, it increased the stock’s liquidity. As a result, Flex (NXT’s holding company) now owns < 52% of the shares outstanding, which may continue to dilute further down the track. This is an essential point for the public, as it means greater liquidity in the non-institutionally held stock, and provides a greater float for those long of NXT to size up without incurring order fill issues at the order book (meaning, you’re more likely to get filled at your bids/offers at the market, vs. higher or lower).

Figure 3.

3. Sentiment appears positive

Sentiment is one of the 3 or 4 catalysts needed to see any stock sell at higher multiples. We see the positive sentiment in NXT’s equity stock in 2 ways.

One, the price structure of the NXT share price is constructive in my view. Figure 4 outlines this well on the daily cloud chart:

• For starters, both price and lagging lines above the cloud, following a bullish cross in August.
• Note the stock has bounced off the cloud base 3 times since April, and traded well off the cloud top in July x2.
• This is good info from the current position of the pricing line. A bounce from here would be a bullish point in my view.
• We have upsides to $51.70 on the point and figure studies in Figure 5 to corroborate this view. A break higher would absolutely activate this point. We shouldn’t ignore the downside target to $40.70 either, hence, the stock’s next moves are critical to form a directional view.

Figure 4.

Figure 5.

Two, Wall Street analysts have revised up their revenue and earnings targets 12 and 11 times in the last 3 months, respectively. Consensus now calls for $2.3Bn in sales for FY’24 and $1.60/share in earnings, 20% and 610% YoY growth, respectively. I typically look for at least 3 ratings higher in 3 months to suggest sentiment is shifting higher. That 12 revisions have been made to the upside is a bullish point in my view.

Valuation and conclusion

The stock sells at 26x forward earnings and 21x forward EBIT. A thoughtful analysis of growth must be factored into these shorthands, however. Management guides to $1.65 in earnings at the top end of growth, consensus projects $1.60 for FY’24 and $2.06 for FY’25. Both are stellar growth numbers, in the realms of 600% YoY, and ~260% off trailing EPS. Say it does $1.60, and you take the 260% implicit growth downstream. The PEG ratio at 26x forward is just 0.1x on this, demonstrating the growth yet to be priced in, by best estimation. Looking to the FY’24 projections of $2.06, assigning the 26x multiple gets you to $53.55/share, 26% value gap as I write. This supports a buy rating in my view.

In short, NXT offers a selective opportunity to ride on the laurels of the IRA and its benefits to renewable energy investment. The company has a productive installed base expanding domestically and globally. Sentiment is positive in the stock and Wall Street is tremendously bullish on the stock as well. Net-net, I rate NXT a buying, eyeing $53 as the next price objective.