Array, $ARRY is a solar systems company that was founded in 1989 and IPO’d on October 15, 2020 and currently has a market cap of 2B. Array makes money by selling mounting/tracking systems for big solar production plants that increase efficiency by tracking the sun allowing the panels to absorb more energy. This video from Array shows their systems well:
Revenue: 2018: $290M 2019: $648M (+123% YoY) 2020: $873M (+35% YoY)
Net income: 2018: -$61M 2019: $40M 2020: $59M (+48% YoY)
Revenue: Q3 2020: $139M Q4 2020: $180M (+29% QoQ) Q1 2021: $245M (+36% QoQ)
Net Income: Q3 2020: -$7M Q4 2020: -$2M Q1 2021: 3M
Good growth numbers on everything except the latest QoQ net income (will get to later).
Now on to the growth of solar as a sector, specifically on utility production (not residential/personal) because Array’s consumers are only in the utility sector. Array has 12% market share of the solar tracking systems. The growth of the solar utility sector directly influences the growth of Array. Solar been quickly rising over the last decade as cost of solar technology decreased significantly over that time period. Solar energy is now cheaper to produce than coal, natural gas and nuclear as of 2020. Energy production and utility companies will follow the money and continue to build solar plants to capitalize on this opportunity.
US Solar Production from Utility (GWh) 2011: 1,800 2012: 4,300 (+138%) 2013: 9,200 (+114%) 2014: 18,300 (+99%) 2015: 26,500 (+45%) 2016: 36,700 (+38%) 2017: 53,000 (+44%) 2018: 66,600 (+26%) 2019: 72,200 (+9%) 2020: 90,900 (+26%) Source: United States Department of Energy
Solar accounted for 2.3% of total energy production in 2020. Obviously plenty of room to grow. Coal, Natural gas and Nuclear combined for 80% of total US electricity production in 2020. Now that solar is the cheapest energy source I expect it to take a large portion of that pie, maybe 25% or more in the next 10-15 years would be my guess. The only thing holding solar back is that the power grids in the US are build only to directly transport electricity from the source to its destination. So there is no element of the grid designed to store electricity. This has not been an issue in the past bc coal, nuclear, natural gas and even hydro produce energy 24/7. Obviously Solar can only produce in the day. The solution to this issue is large, utility scale electric storage. The exact kind provided by Tesla. These storage systems will provide necessary liquidity and versatility to the grid with solar production. The Lithium Ion batteries in these storage systems are rapidly decreasing in price. Prices of Li-Ion batteries have dropped 90% in the last decade. As it becomes more appealing for Tesla and other companies to construct these storage systems and start providing more utility scale electricity storage, more utility companies will invest in solar rigs. It will be more profitable to produce and won’t be held back by the limitations of old grid infrastructure.
Good video by CNBC on the Grid, Storage systems, and the growth of solar utility production:
In the first few months after IPO Array’s price held around the low $40’s, hitting a high of $53.99. In late January until now the stock has sold off significantly. There are 3 main reasons for this and why the concerns are irrelevant in the long term.
- Broader market tech/growth sell off due to inflation FUD. I’m not going to try to predict if inflation will stay, shoot up, or go back down to relatively normal levels but there is one think I know for sure. Tech/growth is cheaper now. Barring hyperinflation and or a depression, this dip gives long term investors a good buying opportunity.
- Tax credit changes hurt YoY revenue. ITC is a federal tax credit that allows people or businesses to right off x% of the cost they spent on solar (and directly related related systems/expenses) on their income tax. This % was 30% up to the end of 2019. Then it is lowered to 26% from 2020-2022, then to 22% in 2023, then 2024+ to 0% for residential and 10% for commercial utility and scale. The fact that there is still a 10% tax creditor the foreseeable future is great. And it doesn’t matter that residential dropped to 0% because Array doesn’t operate in that market. So why would this Tax Credit be bad? Well going back to the top of the post under Quarterly net income I said I would get to later. Q1 2020 was a great Q for array and their revenue. Revenue or that quarter was $438M, compared to the total yearly revenue in 2019 of $650M. Sense that great quarter. Revenue has dropped significantly. And now because YoY of the last Q report is compared to that breakout Q, it makes this Q and YoY growth look really bad. I believe that Q1 2020 revenue was drastically and temporary inflated because of an element of the ITC tax credit. There is a way that constructing solar systems can grab on and hold on to the higher 30% credit from 2019 even if they don’t finish construction before 2020. It is called safe haven. Basically if construction is started and there is a continuous effort made to complete construction and as long as that construction is finished within 4 years, the business will receive the 30% tax credit. In this quarters earnings report, when referring to the 44% decrease in YoY revenue, Array’s CEO said “Results were lower to last year because of the unseasonably high high volume of shipments we had in the first Q 2020 to consumers that were safe harboring tracker systems in connection with the ITC step down” So it seems clear that Array was flooded with orders late 2019 to take advantage of the safe harbor and those revenues showed up on Q1 2020 financials. So even though the YoY revenue from last earnings was bad I believe that the order flow Array is getting was inflated in Q1 2020 and is now deflated because of all the businesses that would be buying trackers now, but bought them earlier because they wanted the better tax credits. I can see this cycle of inflated and deflated order flow/revenue relative to the decreases in ITC tax credits continue until 2024 when the credit stabilizes at 10%. I believe bad YoY data is just a distraction from great long term growth and creates a great buying opportunity.
- Supply chain FUD and one time stock based compensation hurt profits. Rapid increase in the price of raw materials, goods and even cost of transporting those goods going up. Supply chain FUD has stacked on top of inflation FUD sense late February until last earnings and has caused a substantial sell off in Array stock. This Supply chain FUD was realized in last quarters earnings (Q1 2021) when profitably/margins sank because cost of goods shot through the roof. “This industry (solar tracking) is contending with increase in steel and shipping costs that are unprecedented in both magnitude and the rate of change.” – Jim Fusaro, Array CEO in Q1 2021 report. YoY the cost of steel has more than doubled Steel represents the almost half of Array’s cost of goods sold so it’s extreme increase in price has an large impact on the bottom line. Shipping costs have also shot up significantly and have the same effect on the bottom line. Even though revenue in Q1 2020 was $438M and revenue Q1 2021 was $246M, operating costs were higher in this Q large due to one time expense that come with becoming a public company. This includes increase in equity based compensation and costs related to common stock. This is simply a short term expense that negatively impacted this Q earnings and will have no further impact on profits/margins. Array is taking action to secure long term contracts with freight providers and fixing commodity prices with suppliers. This action from array combined with the fact that ridiculous prices of shipping and materials will drop in the next year or two as supply meets demand thanks to capitalism. This Supply chain FUD and bad profitability/margin data from last quarter I believe will also have no impact on future growth long term and only creates a good buying opportunity.
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