Description

 Nextracker Inc. (NXT: $37.64, $5.5b Mkt Cap) 9/17/2024

Nextracker is the leading global provider of intelligent, integrated solar tracker and software solutions in utility-scale and distributed-generation solar projects worldwide. Its products enable solar panels to follow the sun’s movement across the sky and optimize utility-scale plant performance. Generally, trackers deliver up to 20% energy gains relative to fixed-tilt solutions for an average 7% cost increase which nets a 5% lower levelized cost of energy (LCOE) for the project. The trackers represent about 10% of the cost of a utility-scale solar system. The company sells to engineering, procurement, and construction firms (EPC), as well as directly to solar project developers and owners.

Segments:

The company derives 65% of its revenues from the U.S. and 35% from international markets. The largest portion of NXT’s international revenues comes from Brazil, India, Spain, and Australia. Margins in the domestic market are greater than those tied to international sales since the US market is somewhat of an oligopoly and the company has its contract manufacturers located near its customers which limits logistics and transportation expenses.

The company has an annual global capacity of over 50 GW, including over 30 GW of capacity in the U.S.

Company Background:

The company was spun off from Solaria in 2013 and acquired by Flextronics in 2015 for $330 million to expand the company’s international reach. In early 2022, private equity firm TPG acquired a 15% stake at a $3 billion valuation. The company was IPO’d on February 1, 2023, at $24 per share ($3.5 billion valuation). On January 2, 2024, the company separated from Flextronics via a tax-free spinoff.

The company was founded in 2013 by 6 founders, including Dan Shugar (current CEO), Marco Miller (current COO), Mike Mehawich (current Chief Strategy Officer), Alex Au (current CTO) and Marco Garcia (current Chief Commercial Officer), All 6 founders are still with the company. CEO Shugar began his career in the solar industry in 1988. Prior to NXT, he served as the CEO of Solaria Corp, a solar manufacturing company from January 2010 to January 2013. Prior to that, he was the President of Systems, a division of SunPower Corporation from January 2007 to March 2009. From 1996-2007, he served as the President of PowerLight Corporation, a commercial and utility-scale solar system integrator. This is an experienced management team that has been working on trackers since the 1980s. The presence of six of the co-founders at the company 10 years after its origins reflects well on the culture of the company.

It is worth noting that the company has beaten its guidance in every quarter since its IPO. 

Due to restrictions from its tax-free Flex spin-off, NXT is restricted from issuing dividends or buying back shares until January 2026. Accordingly, the company will direct its free cash flow to tuck-in acquisitions that strengthen its product offering for its customers. 

What is a Tracker?

Nextracker thinks of itself as the world leader in the manufacturing of the infrastructure of a solar plant. It makes the control systems, the steel, and the infrastructure that powers the solar plants. A solar tracker incorporates a system of steel racking beams, motors, and controllers that work together to maximize the proportion of sunlight a solar panel is exposed to throughout the day. With improved sun exposure from trackers, solar panels generate more energy compared to fixed-tilt racking systems. 

Its tracker technologies increase energy production while reducing capital and operating costs vs alternative tracking solutions and drive plant return on investment. As the utility-scale solar sector has matured, measuring the lifetime value of a project has become easier and more of a focus for developers. The increased power output gained from investing in trackers at only a slight increase in upfront cost can materially reduce the levelized cost of energy for solar projects. In contrast to panels that are paired with trackers, legacy fixed-tilt solar panels are immobile, generally south-facing, and don’t follow the sun throughout the day. Tracker systems allow a solar plant to optimize energy output throughout the day, by as much as 25% versus a fixed-tilt alternative

Trackers can be either single-axis or dual-axis. Single-axis trackers drive panels along one plane, typically from east to west. Dual-axis trackers enable solar panels to orient multidirectional along both an east-to-west and north-to-south plane. Although dual-axis trackers may provide a slight additional production yield boost when compared to single-axis trackers, they require more space to operate and come with increased O&M costs as a result of more complex components. Single-axis trackers are the preferred system of trackers for utility-scale solar projects and they have become the fastest-growing form of mounting systems within the utility-scale market. It is worth noting that NXT sells both single and dual-axis trackers. 

Trackers can be further segmented into centralized tracking (most frequently sold by Array and other competitors) and independent row tracking (produced by NXT). A centralized system comprises multiple rows of panels connected to one central drive system that moves all panels in unison. An independent row tracker has one drive mechanism that powers each row of panels separately, creating more targeted row-to-row optimization. 

The benefits of a centralized tracker design include faster/easier installation and lower scheduled and unplanned maintenance as a result of a simple design. By eliminating the need for a drive mechanism at each row, centralized tracking systems can also provide cost saving on installation. 

Nextracker’s independent row design allows for a 50% reduction in grading costs as compared to lined-row trackers. Benefits of independent row trackers include their ability to conform easier to challenging site terrain, mitigating upfront costs, and timing delays associated with land grading. Individual motors also provide precise row-level optimization and favorable vegetation management as the unlinked rows allow for single pass mowing and panel cleaning. Their trackers sit higher off the ground, which allows for a greater range of motion and increased bifacial gain. Additionally, independent row equipment providers experience less total system downtime in the event of a motor default as each motor only controls one row of panels. 

WoodMac currently estimates that ~78% of all single-axis tracker shipments are independent row systems. This preference reflects the flexibility of the modular and scalable design that independent row trackers offer developers, particularly when it comes to uneven site locations and abnormal plot configurations. NXT’s independent row trackers are also suitable for a wide range of geographic locations that face varying extreme weather conditions. For example, the defensive stowing capabilities of NXT’s tracker products allow them to be configured in a way that can sustain gusts of wind up to 150 mph and can hold a ground load of snow up to 100 psf. Additionally, in areas subject to extreme hail risk, NXT offers its Hail Pro solution that adds automatic panel stowing at up to 75 degrees. The standard elevation of NXT’s rotation axis at 4’3” to 5’10” also makes its product the optimal tracker for areas with the potential for extreme flood risk.

Recent M&A:

In June 2024, NXT acquired a foundation company, Oijo, for $119 million. The Oijo solution is ideal for anchoring solar arrays to terrain that contains bedrock. It offers patented foundation solutions that reduce subsurface risk and eliminate the need for pre-drilling hard and rocky soils required by conventional pile systems. Oijo employs a truss system that can reduce the total steel material and weight of the foundation by up to 50%, a preferred solution with reduced costs, logistics, and environmental benefits. Combining NXT’s industry-leading solar tracker system with Oijo’s foundation technology offers a turnkey “one-stop-shop” for EPCs and project developers that will create efficiencies through the development, engineering, procurement, construction, and operating phases of their projects. NXT’s two prime competitors in the US, ARRY and GameChange, were customers of Oijo. Roughly 25% of solar projects are located on terrain with bedrock; however, this will likely increase over time as the US government is allowing solar development on federal lands, which contain a higher concentration of terrain with bedrock.

On July 31, 2024, NXT acquired South Pile International for $48 million. SPI provides an innovative alternative solution for weak and expansive soil conditions, as well as sites that experience frost-heave. When there’s frost or soft soils, the posts could sink down and make the tracker go off skew or it has to be drilled really deep. The deeper you drill, the more steel is used, which adds to expenses. It is difficult to drill in soft soil. With the SPI technology, they effectively spin a blade in and it goes below the surface, which provides support to build the tracker on top of it. One of the benefits of these systems is that they enable piles to be removed, reused, and recycled, providing long-term protection of the natural environment.

In summary, as NXT has seen an increased prevalence in difficult geotechnical site conditions, these two acquisitions offer real value to customers to lower costs and reduce uncertainty on the projects.

Competition:

The expertise required to design trackers and customers’ reluctance to purchase products from new entrants with a limited history has resulted in a bifurcation of providers based on their track record with major customers. NXT’s principal competitors are Array Technologies (including STi Norland), GameChange Solar, PV Hardware, FTC Solar, Arctech Solar and Soltec. NXT also competes with smaller market participants in various geographies. From time to time, it competes indirectly with manufacturers of fixed-tilt systems in certain emerging markets. For example, the price for solar panels has experienced significant declines in several markets globally in recent years. As a result, the returns on investment for tracker technology becomes less competitive in comparison to fixed tilt racking systems.

Investment Considerations:

Strong Positions in Oligopolistic Domestic Market and Internationally:

Nextracker is the global leader in the solar tracker industry with a 30% global share.

The company’s market share in the US of 35-40% tops Array Technologies’ 25-30% position. Globally, the company has the largest market share at 25-30%, excluding China. The company’s flexible, independent-row system architecture provides a best-in-class solution for specific project applications, and the company’s long track record of success provides a bankable solution for developer customers as well as project financing and insurance companies. 

Market estimates for the tracking industry are provided by WoodMac and S&P and are somewhat conflicting. 

Woodmac:

According to a WoodMac study, global tracker shipments grew by 28% to 92 GWdc in 2023. The US accounted for the majority of the global market, with Nextracker, Array Technologies, and GameChange Solar, ranking as the three largest shippers in the world. 

The top 10 vendors accounted for 90% of the global market. GameChange Solar, made it to third in the rankings for the first time thanks to 55% year-on-year growth. Together, the three companies accounted for more than 50% of global tracker shipments and 90% of the US market.

The US is the world’s largest individual market for PV trackers. It experienced 10% year-on-year growth last year, to over 37 GWdc of shipments. 

In contrast, China’s tracker market fell to 4.3 GWdc in 2023. WoodMac says Chinese manufacturers experienced much higher demand for fixed-tilt products, as low installation costs were a main driver for developers in China. Despite the drop in demand, Chinese manufacturers TrinaTracker and Archtech climbed into the global top six of tracker shipments, as they expanded their regional presence in the Middle East, central Asia, and Latin America.

The largest European market was Spain, representing more than 50% of the continent’s demand. Spanish manufacturers PV Hardware, Solar Steel, Soltec, and Axial all feature in the global top ten of tracker shippers.

S&P Global:

In the Solar tracker market report 2024, S&P Global said about 60GW of trackers were installed globally in 2023 and over 80GW are expected in 2024. In 2027, more than 100GW of trackers will be installed worldwide. Overall, 752GW of trackers will be installed between 2024 and 2030. Of this capacity, 39% will be from North America, followed by EMEA (31%), the Asia-Pacific region (22%) and South America (8%).

The North American tracker market saw an increase in shipments from 34GW in 2022 to 37GW in 2023. Nextracker (36%), Array Technologies (29%) and GameChange Solar (24%) accounted for 89% of the total tracker shipments. About 98% of the North American market is made up of shipments to the US. The North American market is expected to grow to 50GW annual additions by 2030, with the majority of installations in the US. By 2026, installations in the US are forecast to increase to over 40GW. Although the Mexican utility-scale solar PV market has decreased from its historical highs during 2018-2020, its tracker market is expected to grow and exceed 1GW per year from 2028 onwards.

The competitive dynamics in the US market are favorable. Nextracker was considered to have a duopoly with Array; however, the market has become oligopolistic with the emergence of GameChange Solar. ARRY and NXT comprise 70% market share. This is a natural result of the financing structure for utility-scale projects, where banks have an approved equipment vendor list and prefer established players with solid track records. This creates a barrier to entry in the domestic market.

North America is expected to be the major global market for solar trackers in the upcoming years, while over 750GW of trackers will be installed globally between 2024 and 2030, according to a recent report published by S&P Global.

Over 27GW of solar tracker shipments were delivered to the EMEA region, marking a year-over-year growth of 48%. The EMEA market was less consolidated as the top three suppliers only accounted for 50% of the market share. PV Hardware accounted for 29%, followed by Solar Steel (11%) and Nextracker (10%).

In the EMEA market, tracker installations in Spain are forecast to fall steadily starting from 2025 due to grid connection policies and oversupply. However, the growth in the Middle East will offset the decline in the Spanish market, as large projects are expected to come online between 2028 and 2030 in the region. The gradual growth in the rest of the European market through 2030 will be partly driven by a modest increase in the attachment rate as countries become more confident in tracker technology. Specifically, countries like Serbia, Bulgaria and Romania could experience a rise in the adoption of solar trackers.

The APAC market will grow significantly from 2023 to 2030 driven by India and China. Last year, APAC’s tracker installations were only about 10GW, but S&P Global predicts that it will grow to 29GW annual additions by 2030. The Chinese market will increase by about 50%, from 6GW to 10GW throughout the forecast period, while the Indian market is forecast to reach 12GW by 2030, driven by both rising attachment rates and increases in utility-scale installations.

Australia is also another market that will experience significant growth in the upcoming years, especially between 2027 and 2028.

In APAC, Arctech Solar’s shares reached 32%, the biggest share in the market. JSolar and Nextracker, ranked second and third, only accounted for 13% and 12% of market shares respectively. However, 17% of the market shares were from multiple solar tracker companies, meaning the market in APAC consisted of small-scale solar PV tracker suppliers.

The global tracker industry became less consolidated in 2023, with the top four companies supplying just 59% of trackers to the market. Nextracker was the major tracker manufacturer last year, having supplied 22% of trackers worldwide, followed by Array Technologies (15%), GameChange Solar (12%), and PV Hardware (10%).

Nextracker has a very solid position in India, where it has expanded its capacity to 10 GW of domestic manufacturing capacity with 80% local content capabilities. In addition, it has over 50% of the operating fleet in Australia. Interestingly, in the Middle East region, it has the first operating utility-scale system in Saudi Arabia, which may become a growth market.

NXT Could Increase Market Share Going Forward:

As optimal project site availability inevitably begins to decrease, decentralized infrastructure will likely benefit and increase share. This is due to the ability of independent row systems to conform to difficult or abnormal site terrain better. As a result, upfront project costs and timing delays are reduced. In addition, independent row systems are modular and scalable, providing greater flexibility for abnormal site plot configurations. Finally, decentralized infrastructure can target and mitigate shading anomalies at each row either caused by obstacles at the project site or in certain cloudy situations.

Nextracker’s independent row trackers are ideal for irregular-shaped plots of land with varying terrain. The independent row tracking system alleviates or eliminates the need to grade the land, which saves on capital expenditures and costs as well as construction time. Presumably, solar projects have been developed on the most ideal and easier plots of land first. Therefore, future utility-scale projects will increasingly be located on more difficult terrains, which should bolster demand for independent row systems. It is worth noting that Array, NXT’s largest competitor, introduced its OmniTrack product in the fall of 2022, which allowed Array’s tracker to be built on uneven terrain and closed the competitive gap with NXT. However, Array’s rows of solar panels are still linked by a mechanical link, which makes it more expensive to maintain. As mentioned above, the acquisition of Oijo should help NXT increase its share as terrain conditions become less ideal.

Solar Industry to Provide Solid Tailwinds:

Decarbonization, increased electrification, and declining costs will drive growth in utility-scale solar PV installations through the end of the decade. After a long period of relatively stable growth in energy demand (1.0% CAGR from 2007-2022), the projected demand for electricity is set to accelerate sharply driven by a growing number of devices on the grid and electrification of the automobile industry. The EIA forecasts a 4.6% CAGR for power demand over the next five years. At the same time, there will be a significant retirement of legacy power plants. 

Within renewable energy, solar is the most rapidly growing segment. US Generation from solar is projected to increase from 5% of capacity in 2023 to 24% by 2035. From 2023-2028, the EIA projects that solar capacity will grow at a 26% CAGR. Factoring in a bolus of projected growth from 2023 to 2024 of 39%, the implied EIA growth from 2024-2028 is still a healthy 23% CAGR. 

In its 2024 Energy Outlook, BP projects a staggering eight-fold increase in wind and solar power by 2050 with the majority coming from solar.

Driving this strong growth in solar is the aggressive decline in the levelized cost of energy of solar, which has fallen by 90%. It is now the lowest-cost source of new-build utility-scale power in the country. Improvements in solar design and PV efficiencies have been the drivers for cost declines, but we have reached the point of diminishing returns, however, as economies of scale have been reached and manufacturing processes and methods have been streamlined.

Furthermore, aggressive state-mandated Renewable Portfolio Standards and utility net-zero pledges should drive the growth of solar generation projects. Twenty-six states have RPS targets that are set for a date in the future, 19 states have set targets to achieve at least 50% of electricity generation from non-fossil fuel sources, and 15 states have set a goal of achieving 100%, mostly in the 2040-2050 timeframe. Utility net-zero/renewable pledges fill in the holes that state RPS don’t cover and the most common target that has been set by US utilities over the course of the last five years has been net-zero carbon emissions by the year 2050. 

REpowerEU is the European Union’s plan to reduce its dependency on Russian natural gas. The plan targets 320 GW of newly installed solar by 2025 and 600 GW by 2030, with the intention to displace 9 bcm of natural gas consumption by 2027. Spain, the largest European tracker market recently raised its target of renewables in electricity generation to 81% from a previous 74%, with the PV target nearly doubled from 39 GWac to 76 GWac. 

A report released by Ember-Climate in September 2024 contained a favorable outlook for solar installations (Solar power continues to surge in 2024 | Ember (ember-climate.org)). It projects solar installations globally to reach 593 GW at the end of 2024, a 29% increase compared to the amount installed in 2023. This is following a growth of 86% in 2023. Importantly, solar capacity installations in India in the first seven months of 2024 are 77% higher than in the same period in 2023. By May, it had already installed more solar panels than it did in the entirety of 2023. Installations were lower amid uncertainty around government rules on solar manufacturing.  China accounts for half of the global solar capacity additions. 

Beyond 2024, the Global Renewables and Energy Efficiency Pledge, which aims to triple renewable power capacity by 2030, will drive growth for the sector. Achieving this would mean that solar power generates a quarter of the world’s electricity by the end of the decade. Under this scenario, solar shows the fastest growth, with expectations that it needs to quintuple to reach 6000 GW by 2030. After the high levels of additions in the last two years, annual solar installations would only have to show relatively modest levels of growth to meet this. BNEF forecasts an average growth of 6% per year from 2024 to 2030. They reported 76% growth in 2023 and are expecting 33% in 2024.

Technologies are being developed which serve to further increase the efficiency of and reduce the cost of solar systems. Naysayers point to the intermittency of renewable power as an impediment to its large-scale adoption in the grid. Sharp decreases in battery costs have enabled steep ramping of battery storage, and power plants in the grid both co-located with renewable power and standalone projects. Battery power increased five-fold in the last two years to 15 gigawatts, operating in the USA today. And batteries are expected to triple again to about 50 gigawatts by 2026. Many battery systems have four hours of storage today which pairs well with the solar tracker plant which together provides power through the evening peaks. Improvements in battery technology will provide further tailwinds to the solar industry.

Countries that have already seen rapid levels of solar growth need to make sure they are planning for power systems with high levels of solar capacity. There is already twice the manufacturing capacity available today than is being used. The constraint for future market growth is unlikely to come from solar panel prices. The key will be to ensure that countries have sufficient grid capacity to transport power to where it is needed, as well as develop battery storage capacity to complement solar outside of the sunniest hours. If these actions are taken, solar power could easily continue to surpass expectations throughout the rest of the decade. 

Strong Domestic Manufacturing Base Provides Moat:

Following the government’s 2019 imposition of tariffs on Chinese steel and other solar projects and then the logistical challenges brought on by COVID-19, NXT began aggressively re-shoring US contract manufacturing operations. The company employs an asset-lite manufacturing strategy and its components are produced by outside contract manufacturers. The company has 50 GW of annual production capacity through contracts with 80 qualified suppliers across five continents. 

This model enables NXT to have flexible capacity while minimizing capital expenditures and overhead costs. The company has located its manufacturing partners near its customer sites, which enables drop-shipping of components directly from its contract manufacturers to customer sites which reduces inventory and warehousing of finished goods. 

The company is strategically suited to capitalize on increased demand for U.S. manufactured components that come on the heels of the IRA’s domestic content ITC adder. On December 15, 2023, the U.S. Treasury Department and the IRS issued a notice of proposed rulemaking and public hearing providing initial guidance on the Section 45X advanced manufacturing production credit, which is a per-unit tax credit that is earned over time for each clean energy component domestically produced and sold by a manufacturer. The goal of the 45x credits is to drive domestically made products to be cost-competitive with imports to lower the cost for customers, expand the TAM for solar markets, and create jobs domestically. NXT has been working with its local U.S. manufacturing partners to open or expand over 20 facilities in Texas, Arizona, Pennsylvania, Illinois, Tennessee, and Nevada.  Utility-scale projects that qualify for the IRA’s 30% ITC can receive an additional 10% credit if 40% of the project’s costs of all components used to construct the project are domestically manufactured. This threshold for domestic components steps up to 55% for projects that begin construction in 2027, which should incentivize developers to lean on suppliers like NXT who can 100% domestically source its components. The expected economic benefit to NXT derived from the 45X credit through the sharing percentage with its vendors will be reviewed on a contract-by-contract basis. The Section 45X Credit amount will be reduced by 25% in each of the calendar years 2030, 2031 and 2032.

NXT’s manufacturing partners receive a Production Tax Credit for domestically produced eligible tracker components. These credits are shared with NXT in the form of rebates and are booked as an offset to COGS. The company stands to benefit from increasing its domestic manufacturing partnerships PTC and ITC manufacturing rebates. IRA incentives for domestic content significantly expand U.S. solar project returns and drive incremental demand for NXT’s products.

Flex remains the company’s primary supplier of specialized and complex self-powered controllers and network control units, which enable a row to operate through the electricity produced by the system. NXT has added two other contract manufacturers to diversify its sourcing.  The company’s U.S. manufacturing partnerships give it a competitive advantage relative to its peers. NXT should continue to benefit from the scale provided by these existing partnerships. 

There is somewhat of a flywheel effect here. The company can provide the best service and cost since its suppliers are located the closest to end-market demand. The company has the largest backlog in the US, which gives it the most leverage with its suppliers, which in turn enables it to offer the best pricing to its customers. The additional tax credit that NXT and its suppliers receive enhances this competitive advantage.

Risks:

Supply Chain and Commodity Risk could Negatively Impact Margins:

Steel comprises 80-90% of the production costs for trackers. Components of the supporting system that uses steel as a primary input include piles, torque tubes, bearings, clamps, and purlins. As a result, tracker costs are highly sensitive to the price of steel. The company procures raw material supply commitments from steel mills and then transfers those raw materials directly to contract manufacturers (fabricators) to produce finished products. Most of NXT’s fabricators in the US are either co-located with steel mills or located nearby, which enables NXT to better control materials logistics costs and reduce delivery time to customers. 

Grid Connection Delays:

One of the most commonly cited risks for utility-scale project development is delays due to long interconnection queue times and/or labor shortages. According to Lawrence Berkley National Lab, grid connection backlog grew by 30% in 2023 and eight-fold over the last decade. The growing backlog has become a bottleneck for project development as proposed projects are consumed by lengthy interconnection study processes with a material amount ultimately being canceled or withdrawn. Due to the increasing backlog, the timeline from the initial connection request to having a fully built and operational plant has increased from less than 2 years in 2010-2018 to greater than four years for projects built during 2018-2023. Interconnection requests take more than 3 years to complete the required grid impact studies in most regions. To date, Nextracker has been immune to these challenges.

While the interconnection-related delays defer growth into the future, NXT laid out some solutions on its 2Q25 earnings call. It delineated grid-enhancing technologies which can expand the capacity of power lines within a year or two. This could eliminate the need to construct new power line corridors which could take multiple years. Examples of these technologies include: dynamic thermal rating (use wind to cool power lines to expand capacity), High-Temperature, Low-Sag conductors (updating traditional power lines), and power flow controllers (regulate power flows by redistributing power flows through alternative paths). NXT noted that these technologies are gaining support from FERC and other regulators to increase capacity in a low-cost and timely method.

Legislative Risks:

The Inflation Reduction Act of 2022 ("IRA") made significant changes to the incentives available to solar energy projects. As a result of changes made by the IRA, United States taxpayers may be entitled to a 30% ITC for certain qualifying projects placed in service after 2021 and increased further to 40% for projects placed in service after 2022 that satisfy certain “domestic content” requirements. For projects placed in service after 2022, these credit amounts are subject to an 80% reduction if the project (1) does not satisfy prevailing wage and apprenticeship requirements, (2) has a maximum net output that is greater than or equal to one megawatt of electrical (as measured in alternating current) or thermal energy and (3) begins construction on or after January 29, 2023 (the date that is 60 days after the Internal Revenue Service ("IRS") released guidance relating to the prevailing wage and apprenticeship requirements).

The industry is heavily reliant on the 30% ITC component of the IRA as a driving force for utility-scale solar demand in the US.  Prior to the IRA, the ITC had expired partially. It will now remain in place until 2033.

There seems to be a limited likelihood of the IRA being repealed in the event of a “red wave” in the U.S. November election. It is most likely that the IRA is here to stay regardless of the administration. It is possible, however, for the IRA to be amended to companies that receive credits need to be domiciled in the U.S. This would end up benefiting NXT. According to Jefferies, 78% of IRA investment announcements are in Republican congressional districts. Furthermore, Trump has made low energy and electricity prices a priority for his campaign.

Escalating trade tensions, particularly between the United States and China, have led to increased tariffs and trade restrictions, including tariffs applicable to certain materials and components for products such as steel or for products used in solar energy projects more broadly, such as solar modules and solar cells. There currently is a safeguard tariff on most imported solar modules and cells pursuant to Section 201 of the Trade Act of 1974. The Section 201 tariff is set at 14.25% until February 6, 2025, at which point it will drop to 14% until February 6, 2026. The Section 201 tariff has not applied to bifacial panels but the tariff exemption for bifacial panels will be revoked, subjecting bifacial panels to the Section 201 tariff. There also are tariffs on various solar equipment, including solar cells and modules, inverters, and power optimizers, imported from China under Section 301 of the Trade Act of 1974. On May 14, 2024, the Office of the United States Trade Representative announced that President Biden had increased Section 301 tariffs on certain Chinese steel products to 25%, increased Section 301 tariffs on Chinese solar cells and modules to 50%, increased Section 301 tariffs on Chinese lithium-ion EV batteries and battery parts to 25% and would be increasing Section 301 tariffs on Chinese lithium-ion non-EV batteries to 25% in 2026. While the Section 201 and Section 301 tariffs on solar products are not directly applicable to NXT products, they may indirectly affect the company by increasing the costs of components of solar energy projects.

On August 18, 2023, the Department of Commerce clamped down on solar cells and modules produced in Vietnam, Malaysia, Thailand, and Cambodia using components from China. As a result, cells in these areas are now subject to the same antidumping and countervailing duty (“AD/CVD”) orders on solar components from China that have been in place since 2012. This went into effect on June 6, 2024. Industry participants have noted a slowdown in projects as a result of the disruption to the supply chain as a result of these new duties. NXT has not been too concerned, however.

How Sustainable is the Margin?:

The modular nature of utility-scale components makes design and manufacturing relatively simple. Rapid technological improvements and low capital intensivity make the space accessible to new entrants. Offsetting these risks is the current status of the company’s patents. In addition, NXT is well-positioned given its solid relationships with key solar developers and EPCs who value the bankability of NXT products.

NXT rationalizes its pricing power as it envisions itself as the skeletal and nervous system for solar power plants. A 100-megawatt plant, for example, is a $100 million plant, the tracker may be a $10 million scope. Why would you go to a Tier 2 to save, even if it's like 10%, you save a $1 million. And then in the U.S. after the tax, it's a 30% tax credit in the accelerated depreciation, it might be a couple hundred thousand dollars. So you're going to go to a Tier 2 for that. And then your whole skeletal and nervous system is dependent on a Tier 2 provider that might be undercapitalized with not a lot of take-out there in the real world. 

Solar trackers are not commodity products but are highly engineered for site-specific conditions such as soil and foundation requirements, topography, wind speeds, panel type, and local permit needs, codes, and standards.

At a JPMorgan conference on June 17, 2024, NXT’s new CFO, Charles Boynton noted that pricing has declined in the high single-digit range annually. It has managed to outpace ASP reduction, however, with cost reductions. As it reduces costs, it passes some on to its customers. NXT believes with differentiated products it can protect its margins.

At the RE+ conference in September 2024, GameChange made some comments that called into question the sustainability of the industry’s margins. They expect pricing competition to significantly impact their margins in 2025. They mentioned that NXT has been competitive with its pricing and ARRY’s pricing comes in waves. GameChange noted that there is not much room for cost-downs, so margins will likely decline across the sector. Gamechange is already trying to increase its use of low-cost Chinese imports to offset pricing pressure. Margins will likely be compressed in '25 into '26 and management believes its margins will decline to the 22-23% range, down from the 28-20% range currently.

Array and NXT responded to GameChange and quelled some of the concerns raised. Management acknowledged price declines in 2025 but said that price declines were in line with cost-downs, in line with prior comments. Array contradicted GameChange Solar’s commentary on margin compression to 25%, which is in line with pre-45X gross margins as companies pass down benefits. Array noted that private companies like GameChange Solar don’t have as much cost-down available, and noted steel price declines and process improvements leading to cost-downs. ARRY noted that it is not sharing 45X benefits with its customers and is still seeing gross margins in the low-mid 30s for 2025.

How Strong are the Patents and What is the Risk Upon Expiration?

NXT success depends on its ability to maintain and protect its proprietary technologies, information, processes, and know-how. As of March 31, 2024, it had 104 issued U.S. patents, 227 granted non-U.S. patents, and 295 U.S. and non-U.S. patent applications pending, including provisional patent applications pending in the U.S. and pending applications across our product portfolio. NXT’s U.S.-issued patents are scheduled to expire between 2028 and 2041. Its patents cover the broad range of our solutions, including mounting, assemblies, software, methods and solar tracker-related technologies.

Customer and Supplier Concentration:

In FY24, NXT’s largest customer constituted 17% of its revenue and its top five largest customers collectively accounted for 41% of the company’s revenue.

The company is dependent on certain critical suppliers for certain components of its products. Its self-powered controller and network control unit are predominately manufactured by Flex. It has an agreement with Flex for the manufacturing of these components but operates on a purchase order basis for pricing. The processes to manufacture these SPCs and NCUs are highly complex, specialized, and proprietary. Although it has recently added two suppliers who manufacture SPCs, if Flex is unable or unwilling to manufacture controllers for us, or increases its pricing substantially, a substantial portion of its supply of these critical components would be interrupted or delayed. 

Financial Results:

The company has significantly improved its gross margin over the past few years thanks to its efforts to redomicile its supply chain in order to reduce its logistics and transportation costs. Its structural gross margin expectations have increased from the mid-20s to the high-20s for FY25. This expected increase factors in 45X benefits, variations in regional and customer mix, and expected pricing pressure that may lower ASPs. The 45X benefit is one element that lowers the cost of our trackers and is used in combination with other elements, including cost-downs, lower logistics costs, and maximizing local content, all of which come together in the form of lower LCOE that, along with pricing discipline, supports NXT’s confidence in its structural margin profile.

Margins are projected to be lower in the remainder of the year than in 1Q25 since there will be a higher proportion of international revenue, which carries lower margins.

The implied guidance calls for the US to be flattish over the remaining three quarters. This seems conservative. Management has had a history of beating guidance.

The valuation of NXT is compelling. For FY25, it is projected to earn $2.89-3.09 per share. However, this includes a projected interest expense of $12 million. Given that the company has $471 million of cash and $145 million in debt on the balance sheet, it seems punitive to include the interest expense. Adding back the after-tax interest expense is an incremental $0.06 per share. At the current share price of $36.41 and backing out the net cash per share projected at the end of FY25 of $4.28 per share, shares are valued at 10.3x FY25 EPS.

This is a cheap valuation for a market leader in a rapidly growing industry where the largest market is an oligopoly. As the calendar approaches the two-year anniversary of the tax-free spinoff in January 2026 when it will be able to pay a dividend and/or buy back stock, the share price should naturally appreciate.

Catalyst

Election

Dividend/Buyback Color