Nextracker Inc.: Riding The Solar Power Tide While Growing Profitably (NASDAQ:NXT)

Thesis

Nextracker Inc. (NASDAQ:NXT) is an established solar tracking systems and software solutions provider. Being a global industry leader tied to the solar power ecosystem, NXT is a way to invest in clean energy without facing matters such as the high rates that capital-intensive companies currently face, stagnant growth, or relatively decreased earnings. In addition, the solar capacity increasing growth paves the way for NXT’s growth, while competent management achieves increased revenue and improved profit margins quarter after quarter, also beating expectations. Despite recent criticism, solar power capacity will continue to grow for many years and is poised to become a dominant energy source, further amplified by the energy crisis, while government funding will continue flowing into sustainable energy projects. Riding this megatrend, being profitable, FCF positive, and net debt negative, while growing, makes NXT a successful investment for the coming years.

A booming ecosystem

The solar power ecosystem is expected to accelerate growth in the coming years. According to the International Energy Agency’s “Renewable Energy Market Update – Outlook for 2023 and 2024“, 2024 is expected to be a record year for global capacity additions, led by solar PV. Furthermore, cumulative PV capacity is expected to become the largest installed electricity capacity worldwide, reaching 2,350 GW by 2027 in IEA’s main case scenario. Nextracker will benefit from that trend which is expected to be continued at least until 2027.

A Brief Company Overview

The company was founded in 2013 by the CEO, Dan Shugar, and was acquired by Flex Ltd. in 2015. In 2016, (FLEX) acquired BrightBox Technologies to enhance NXT’s machine-learning capabilities. NXT was a Flex Ltd subsidiary that was carved out, and commenced trading on Nasdaq, on 02/09/2023. 30,590,000 Class A shares sold at an IPO price of $24.00 providing NXT with $693.8M of net proceeds. On 07/03/2023 NXT completed a follow-on offering, at $36.50 per share, issuing 15,631,562 Class A shares and receiving net proceeds of $551.0M to acquire 14,025,000 Nextracker LLC common units from Yuma, and 1,606,562 Nextracker LLC common units from TPG Rise that were simultaneously surrendered, and canceled. On 10/25/2023 NXT announced a plan to separate from FLEX expected to close in Q4 2024 (ending March 31) and has now been completed, as mentioned in a 01/02/2024 press release.

Nextracker is the global leader in the solar tracking industry. The company offers high-quality, intelligent solar trackers and supportive software solutions to solar projects in over 30 countries (including the US, India, Mexico, Spain/Europe, Australia, the Middle East, Africa, and Brazil) and has landed top-tier clients. Its products enable solar panels to track and follow the sun’s movement so that a solar park can maximize performance.

NXT’s main products are:

• NX Horizon
• NX Horizon-XTR
• NX Gemini

Its monitoring and control software solutions are:

The company also presents 400 issued or pending patents.

Q2 2024 ER

On 10/25/2023, a strong Q2 2024 ER was announced. Revenue stands at $573M (+23% y-o-y), GAAP net income at $81M (EPS $0.55), non-GAAP net income at $96 million (EPS $0.65), and adjusted EBITDA at $110M, (+164% y-o-y). The company holds ~$373M in cash while debt (long-term) is ~$145M. Its backlog by the end of the quarter is significantly over $3B.

In addition, NXT raised FY 2024 guidance:

• Revenue: $2.3B to $2.4B (vs. $2.2B to $2.4B)
• GAAP Net Income: $237M to $266M (vs. $176M to $205M)
• Adjusted EBITDA: $390M to $440M (vs. $290M to $340M)

NXT recently announced that the Q3 2024 Earnings Report will be released on 01/31/2024; another solid ER is expected.

Valuation

While I was studying the company a few months back, apart from the rest, I was also attracted by certain ratios, yet, my time was limited, thus, I neither completed my analysis nor initiated a position. Around that time, according to the Seeking Alpha metrics, the P/E GAAP (FWD) ratio was ~20.21 (the industrials sector median was ~18.70, a slight premium which is justified in my opinion considering NXT is a profitable growth company). The PEG non-GAAP (FWD) ratio, suitable for profitable-growth companies, was ~0.58 (significantly <1 and ~63% lower than the sector median of ~1.58). The P/S (FWD) ratio was ~0.96 (~22% lower than the sector median of ~1.23). These facts were pointing out that NXT was undervalued. The share price was ~$32 then.

These ratios currently stand at:

• P/E GAAP (FWD) ~22.41 (sector median ~21.68).
• PEG non-GAAP (FWD) ~0.59 (~66% lower than the sector median of ~1.76).
• P/S (FWD) ratio ~1.09 (~23% lower than the sector median of ~1.41).
• The share price is ~$42.

This is a result of the recent market rally and the January correction of the NXT stock that gradually brought the valuation to more attractive levels. Regarding the PEG ratio, even applying a significantly lower earnings growth estimate, let’s assume halving it, wouldn’t be enough to bring the ratio close to the sector median. Acknowledging that the management delivers while assuming NXT will continue marching on the profitable growth path, the company could keep raising its value and stock price for the coming years. A stock price of ~$65 would seem fair, if not conservative, and could be achieved in the next few years.

Risks

• Competitors may gain a larger market share, offer lower prices, or present better products.
• Solar power growth may be lower than expected.
• Despite NXT being an established company, it is still growing, thus, volatility can affect the stock price.
• Government funding or benefits regarding sustainable energy may be lower than expected.
• Supply chain problems could emerge.
• The high-rate macro environment could affect NXT’s financing planning.
• Raw material costs may rise.

Conclusion

To cut a long story short, sustainable energy is a 21st-century megatrend, a fact that is extremely unlikely to change, regardless of short-term possible back-and-forths. NXT is riding this tide and will benefit from the accelerating growth of solar PV capacity. In addition, net-debt negative NXT isn’t in danger of profit decline or funding difficulties because of the high rates. A profitable growth leader operating in the booming solar power ecosystem in tandem with a fortified balance sheet cannot leave investors untouched. NXT’s recent rally to as high as ~$50 should be considered fairly justified compared to the sector and general market condition, however, I decided to wait for a more attractive valuation and eventually, a stock price correction is underway and could be further fueled by the NXT stocks issued to Flex shareholders under the terms of the separation plan. Thus, investors should seek to take advantage of this correction and initiate a position.