FTC Solar: Utility-Scale Solar Is Booming But Sales Are Down

FTC Solar (NASDAQ:FTCI) went public roughly a year into the pandemic in the spring of 2021. In spite of this being a period characterized by high euphoria and untamed animal spirits, its common shares would fare badly. They fell from its $13 per share IPO price to around $7 as of the end of 2021 and have since fallen to just over $2. The stock is down 68% over the last year and has moved lower in recent weeks to trade at a near-record low. What's happening?

The Austin, Texas-based solar tracking company faces a wall of structural demand as utility-scale solar moves towards its time in the sun. Solar accounted for 50% of all new electricity generating capacity added in the US in 2022. This was a record year and saw 20.2 gigawatts of solar PV capacity added, enough to power 25 million US homes. The Inflation Reduction Act, a large set of subsidies to supercharge the rollout of net zero, looks set to form a critical pillar of growth for the industry in the US. Critically, the IRA could see zero-carbon energy grow up to 80% of US electricity production as soon as 2030, up from 20% of production currently.

On the back of this, the rollout of utility-scale solar is set to increase by at least 40%, or 62 GW, over pre-IRA projections through 2027. Whilst competition from Array Technologies (ARRY) and Nextracker (NXT) for market share will be strong, the market is large and fast expanding. Array is up 47% over the last year and Nextracker just went public at a $3.5 billion valuation. FTC currently trades at a $215 million market capitalization so is the smaller of the three.

A Revenue Miss

Solar trackers optimize electricity production from solar farms by allowing solar panels to track the angle of the sun throughout sunlight hours. FTC retails a single-axis tracker called Voyager. The company also sells engineering services and software meant to help solar developers with design and operational management.

FTC's fiscal 2022 fourth quarter earnings saw revenue come in at $26.22 million, a 74.2% decline from the year-ago quarter and a miss by $4.17 million on consensus estimates. Whilst up 58% sequentially from $16.6 million in the third quarter, revenue growth remains far below its averages with the company beset by a number of operational challenges. This centred on high logistics and steel costs against what management flagged as a rather challenging regulatory backdrop. There have been some bottlenecks to the company's ability to realize a backlog that grew to over a billion as of the end of the quarter with the Uyghur Force Labor Prevention Act restricting imports of specific solar modules from the Xinjiang autonomous region.

GAAP gross margins were negative 7.3% with total operating expenses increasing by 20% to $17.95 million in the fourth quarter. Loss from operations at $19.86 million drove a cash burn from operations of $5.4 million. This was an improvement from a cash burn of $40.4 million in the year-ago quarter and meant cash and equivalents as of the end of the fiscal year was $44.4 million. The company faced a torrid quarter with management during the earnings call stressing that they see these headwinds as temporary whilst highlighting their robust order backlog. This added $240 million in new orders in the fourth quarter to reach $1.2 billion, a new record.

A Cloudy Future Under The Sun

FTC provided guidance for the first quarter of 2023 and expects revenue to be between $36 million to $40 million. The top end of this range would be a decline of around 20% versus the year-ago comp but would come ahead of consensus estimates for revenue of $38.80 million. The company expects gross margins to be positive, but on a non-GAAP basis of between 2% to 8% with non-GAAP adjusted EBITDA losses to be not lower than $6.8 million.

Tracking solar PV now has one of the lowest per MWh levelized cost of electricity versus other sources of energy after falling from $304 in 2009 to $40 as of 2022. This is set to be driven lower over the next decade and could potentially drop as low as $5 per MWh by 2029. Hence, the future of the technology is bright even as FTC faces short-to-medium-term disruptions to sales.

The company now trades at a 0.73x price to forward sales multiple, around 44% lower than its peer group median. This opens up the core reason to be bullish. A return to healthy growth on the back of the strong order backlog should help the valuation recover back above 1x and drive the commons higher. I'm neutral on taking a position until this happens but the long-term trend for FTC is strong.