Shoals Technologies Inc. - SHLS

Quick Update

The solar names have all been on fire, and SHLS is no exception.  I first commented on SHLS back in March when the stock was $22 and on its way to $10.  Now that the stock has perked back up to $25 or so on the back of positive announcements regarding solar panel tariffs being dropped and the green components of the so-called Inflation Reducation Act, I thought I would provide a couple more comments on the back of their recent earnings announcement.

Revenues – As I outlined in the initial spiel, revenues through the first 3 quarters of 2022 are going to be aided by the acquisition of ConnectPV that was completed at the end of August 2021.  While the company does not provide any numbers for the ConnectPV contribution to 2022 revenues, they were doing around $7M a quarter prior to the acquisition, so of the $13.8M year over year revenue increase about half of it would have come from acquisitions rather than organic growth, so real growth was closer to the 12% range rather than the 23% the company has in their press release, and down from the 33% “organic” growth they would have shown in Q1.  The company also highlighted the 97% growth within their “components” segment vs. the 11% growth in their “systems” segment, since supposedly customers usually start buying single items before transitioning to a complete systems strategy.  Component revenues have now finally risen back to the level that they were at the start of 2021, which may not speak well for future order flows.

Backlog – The company provides a combined backlog number along with a couple of sub-components; “signed” orders and “expected” orders.  On the bright side, the company was able to move some orders from the expected column into the signed column, as the signed column increased by $45M while the expected number declined by $20M, for a sequential net uptake of $25M in orders or expected orders, which is good for an 8% increase.  This comes on the back of a paltry 1.1% increase in Q1 and a 10.4% increase in Q4 after the ConnectPV-assisted 35% increase from Q3 2021.  Given the expected 40% increase in utility-scale solar power facilities in 2022, the backlog increases have been trailing expectations.  On the call, the company declined to comment on where they believe the number is headed.

Balance Sheet – most folks tend to ignore the balance sheet, but total A/R (they have both billed and unbilled) is up a nifty 60% so far this year and 45% year over, during which the top line is up only 23%.  Inventories are now $65M, up a hefty 205% year over year and 330% since the start of 2021.  “Adjusted EBITDA” has remained flat year over year at about $20M and is expected to remain flat for the remainder of the year, while operating cash flows remain firmly negative at $6M. 

I get that this is a sexy part of the market right now.  The company has both the solar panel installation and the EV charging markets as part of their overall business plan, and the US government is inclined to throw tons of money at these markets in order to force a transition.  However, I would also point out that SHLS, with around 170M shares outstanding, is currently sitting on a $4.5B market cap for what they believe will be around $300M in 2022 revenues, or around 15x that number.  When a company can go out into the private market and buy companies for less than 1x revenues and ask the public markets for a 15x revenue valuation, it just annoys me. Adjusted EBITDA is going to be in the $80M range, which places that in the 60x category.  The stock is sitting at pretty lofty valuation levels even if they continue to grow revenues organically in the mid-teen range.