Tigo: Beneficial 2023 Guidance, Solar Industry Exposure, And Not Expensive (NASDAQ:TYGO)

Tigo Energy, Inc. (NASDAQ:TYGO) recently reported impressive expectations for the year 2023 including double-digit net sales growth and EBITDA margin growth. Also including headcount growth related to its R&D activities, I believe that Tigo could present new offerings and geographic expansion in the United States and Europe. With all these new ideas in mind, like other analysts, I am expecting FCF growth from 2024 and 2025 as well as growth in line with the expectations of other companies in the solar industry. For these reasons, I think that the company is a buy. There are obvious risks out there from supply chain disruptions, lower net sales growth than expected, or changes in environmental laws. However, TYGO does not seem to trade expensively.

Tigo Energy

Tigo Energy, Inc. is composed of Tigo Energy, Inc., its direct subsidiary Tigo Energy MergeCo, Inc., and several indirect subsidiaries. Legacy Tigo, founded in Delaware in 2007, is the precursor entity.

Specializing in solar energy and storage solutions, the company, based in Campbell, California, offers technologies, such as Module Level Power Electronics, to optimize solar energy production in various environments. It has offices in Europe, Asia, Australia, and the Middle East. In addition, it has a global presence with product installations in more than 100 countries.

The company is a global leader in the development and manufacturing of intelligent hardware and software solutions that improve safety, increase energy efficiency, and reduce operating costs for residential, commercial, and utility solar systems. It sells products of its own development, such as Module Level Power Electronics and its Energy Intelligence Solution or EI Solution.

Company’s MLPE products consist of devices that connect to solar modules and offer various functions, including improved safety and energy production. Their optimizers are designed as highly flexible solutions that work with thousands of inverter and module combinations. The sale of these products constitutes the main income of Tigo Energy.

The company started offering EI Solution to customers in the United States and Europe in late 2022. These products power everything from kilowatt-scale residential systems to much larger commercial, industrial, and utility systems, ranging from hundreds of megawatts in rooftop, and floating applications.

With that about the business model, I believe that there is one thing that will most likely capture the attention of investors out there. These are Tigo’s clients. Even if you do not know Tigo, you will most likely know the companies working with Tigo. They are large and established business conglomerates in the solar industry. In this regard, have a look at the image below.

Expansion In The Residential Market Through Offerings With U.S. Solar Providers And International Efforts Will Most Likely Bring Net Sales Growth

The company acknowledges that it expects most of its future revenue to be generated from existing customers, but aims to invest in sales and marketing to expand reach with new customers primarily in the US and Europe. I believe that both internationalization and further geographic expansion in the United States could bring net sales growth.

In order to continue growth, we intend to expand our presence in the residential market through offerings with U.S. solar providers.

We also expect to continue to evaluate and invest in new market opportunities internationally. We believe that our entry into new markets will continue to facilitate revenue growth and customer diversification. – Source

Further Innovation Thanks To R&D Of EI Solution Could Also Bring New Business Developments

I also believe that further investments in research and development mainly in the EI Solution could bring further efficiency growth and more capabilities. As a result, I believe that Tigo could identify and commercialize new products and services, which may bring net sales growth. Management discussed these initiatives in the last annual report.

While we will continue to invest in research and development to expand the capabilities of our existing products and solutions, we intend to continue the development and promotion of our EI Solution. Source: 10-Q

It is worth noting that Tigo appears to be investing a bit more in R&D, and there seems to be headcount growth inside the organization. The company noted the following in the last quarterly report.

Research and development expenses increased primarily due to higher personnel costs as a result of increased headcount. Source: 10-Q

Tigo Operates In A Market That Grows At Double Digit, Which May Enhance The Company’s Net Sales Growth

Additionally, I believe that it is worth noting that the global solar energy market growth is expected to be close to 11.5%. With a sufficient amount of sales and marketing expenditure, I believe that we could see net sales growth close to that of the market. I included these assumptions in my DCF model.

The global solar energy market size was worth around USD 90.4 billion in 2022 and is predicted to grow to around USD 215.9 billion by 2030 with a compound annual growth rate of roughly 11.5% between 2023 and 2030. – Source

Tigo Energy’s Expectations For 2023 And Other Market Analysts

I took a look at the financial highlights reported by Tigo Energy in order to design my income statement expectations. In the first nine months of 2023, the company reported $136 million and an adjusted EBITDA of $12.6 million.

The expectations for 2023 include net sales of close to $136 million and triple-digit net sales growth. With a gross profit margin of close to 36% in 2023, gross profit would be close to $48 million. Besides, 2023 operating income would be about $5.3 million, with 2023 Adjusted EBITDA of $12.6 million and an EBITDA margin close to 9%. Finally, 2023 net income would be close to $13.8 million.

Analysts out there are expecting sales growth in 2025, 2025 net income growth, and positive FCF from 2024. My numbers are in line with the expectations of other analysts, so I thought that showing their figures would not harm them.

In particular, market estimates include 2025 net sales of $155 million, 2025 EBITDA close to $-3 million, EBIT of $3 million, EBT of -$2 million, and 2025 net income worth -$3 million. Finally, with a 2025 free cash flow of $12 million, the 2025 FCF margin would be close to 7.54%.

Balance Sheet, And Cost Of Capital

With an asset/liability ratio of more than 2x, a current ratio of over 1x, $2 million in cash, and $34 million in marketable securities, I think the balance sheet looks stable.

TYGO also reported long-term debt close to $29 million. However, given the FCF expectations for 2025, I am not concerned about the total amount of debt. With that, I used a WACC close to 11.05%-15.05% because TYGO is a small company.

My Expectations, And Valuation Model Based On My Previous Assumptions

My numbers about future income statement expectations include 2030 revenue of $235 million, with revenue growth of 7%. I also assumed a cost of revenue of about $76 million, gross profit worth $158 million, and gross profit margin close to 32%.

It is worth noting that coming out with forecasts was not easy because the company recently executed a merger agreement. We do not really have many years of financials to understand the future of the business model.

Additionally, with operating expenses, including research and development of $25.05 million, sales and marketing of about $66 million, and general and administrative expenses of $43.05 million, I obtained total operating expenses of close to $135.05 million. Finally, with income from operations of close to $23.05 million, I obtained a net income of about $23.05 million with 2030 FCF of $30.05 million.

Note that I obtained FCF margin close to 8.05%-12.05% and net income/net sales of 6.05%-10.05%. I believe that it is in line with the numbers delivered by peers in the industry. I believe that my numbers are quite conservative.

For the valuation of the company, I took into account that the median EV/EBIT in the industry stands at close to 9x. Hence, I used exit multiples close to 9.05x-12.05x.

Also, with a WACC of close to 11.05%-15.05%, which I believe is sufficiently conservative, I obtained a price forecast close to $3.2 and $4.53 per share. The internal rate of return would be close to 10.05% and 21.05% with a median close to 13.05-15.05%.

Competitors

The company is responsible for highlighting that the sector in which it operates is highly competitive, which may be considered among the risks, and also affects the times of the industry, which is highly volatile when it comes to the incorporation of new technologies.

Specifically, the competition from the Asian market stands out, which is very present in Australia and Europe. These competitors operate with very low production costs. In addition, many of the competitors have financial resources that allow them to offer competitive products at aggressive market prices, even below the cost of production.

Risks

We already mentioned the high competitiveness that exists in the solar energy industry. It is also a cyclical industry with recurring periods of recession. On the other hand, Tigo Energy has a history of generating net losses and believes that it may not be able to maintain profitability in the future if it does not achieve adequate revenue growth while its expenses increase.

The company places high expectations on its expansion in residential areas in the United States, which is subject of course to the progressive adoption of solar energy in these homes. Another risk factor comes from the fact that the company relies heavily on a small number of third-party contract manufacturers, and its business and operations could suffer disruption if it encounters problems with these contract manufacturers.

In addition, the installation and operation of its energy storage systems are subject to environmental laws and regulations in various jurisdictions, which vary over time and represent a source of uncertainty.

I also believe that there are some risks that arise from the reverse recapitalization that took place last year. The business transformation was carried out through an agreement and plan of merger signed on December 5, 2022, between Roth CH Acquisition IV Co., Roth IV Merger Sub Inc., and Legacy Tigo. The merger, completed on May 23, 2023, resulted in Legacy Tigo becoming a full subsidiary of ROCG, which subsequently adopted the name Tigo Energy, Inc.

Tigo did not execute an IPO in order to sell shares in the market. In my view, the fact that no underwriters executed due diligence about the assets reported by Tigo may be disliked by some investors.

Conclusion

Tigo Energy is operating in the solar industry, which is expected to grow at a double-digit in the next decade. Tigo also reports large and established business conglomerates in the solar sector. In addition, the company is reporting further investments in sales and marketing as well as R&D to offer both geographic expansion and new offerings, which may bring further net sales growth. In particular, the ongoing development and promotion of EI Solution as well as noted headcount increase in research and development indicate meaningful efforts that could lead to new offerings. For these reasons, I believe that the stock is a buy. There are risks from the fact that Tigo Energy executed a reverse recapitalization. Lower net sales than expected also represent a risk factor. With that, I believe that Tigo could trade a bit more expensively in the coming years.