Long Pitch on Nextracker (NASDAQ: NXT)

The Pitch

Nextracker Inc. (NASDAQ: NXT) specializes in advanced solar tracking solutions for utility-scale solar energy projects. Its flagship single-axis solar tracking technology, TrueCapture, optimizes panel alignment with the sun's movement, increasing solar generation efficiency by approximately 30%. This unique technology enables significant energy production gains for Nextracker's clients and enhances its value proposition in a rapidly growing renewable energy market.

The solar tracking market is a growing segment within the larger renewable energy industry, projected to reach a TAM of $71 billion by 2034. As decarbonization efforts drive global investments in renewable energy, solar is expected to constitute 70% of new renewable capacity additions by 2027. The solar tracker market specifically was worth $4.41 billion in 2022 and is expected to grow at a CAGR of 26.2% to a $28.37 billion market in 2030 (around half of which will be single-axis technology). In the single-tracker market, Nextracker operates in a competitive yet oligopolistic market, primarily contending with Array Technologies (ARRY). This competitive landscape is characterized by increasing demand for efficiency and reliability, where Nextracker has established a leading market share, and leads in capacity installed.

Nextracker's primary competitor is Array Technologies, which also focuses on utility-scale projects. Nextracker distinguishes itself with a unique, terrain-agnostic technology portfolio, backed by 104 U.S. and 227 international patents and strong R&D investments, positioning it favorably in various geographic markets, particularly those with challenging terrains. Its terrain-agnostic technology reduces site grading by up to 90%, achieving the industry's lowest levelized cost of energy (LCOE). This innovation allows it to meet specific client needs and maintain a margin advantage. The table to the right (data as of 11/10/24) depicts the top four public solar tracker companies by capacity installed.

While weakening earnings among Nextracker's peers may account for their heightened multiples, it also shows the relative insensitivity to earnings decline and optimism of investors. In the case of Nextracker, this is a positive signal for potential multiple appreciation. Nextracker also leads the group in both revenue and operating margin, suggesting it has both strong market demand and operational efficiency, which are indicators of continued dominance. Nextracker, relative to peers, will be more capable in further R&D, price competition, and TAM expansion in a self-fulfilling cycle, especially in a growing market. NXT has demonstrated strong operating leverage, with a 3.48 DOL since FY20, driven by an 18% increase in gross margins since FY22.

Over the last six months, renewable energy equities have performed poorly. Graphed below are NXT (blue), Global X Solar ETF (white), and iShares Global Clean Energy ETF (yellow). For reference, the S&P 500 is up 7.2% over the same period.

Despite rallies in early November, Nextracker has continued its downward trend. Since Trump's election, Nextracker shares have traded down 23.25% and have not participated in broader market rallies, reflecting what we believe is an overreaction to fears that solar companies will face headwinds. The market has disproportionately punished Nextracker, reacting strongly to concerns about the new U.S. administration's potential impact on solar energy policies and the downstream effects on new solar projects. Nextracker's technology is integrated in the production phase of solar projects, and if new utility scale solar developments decrease, volumes will decrease for NXT. We believe the market underappreciates Nextracker's strong potential to maintain industry-leading margins, product differentiation, and near-term revenue streams from emerging markets and the expanding data center sector.

We believe this is an overreaction as the fundamentals that support solar are still present. Even on an unsubsidized basis, where fuel costs have decreased for conventional energy methods, utility scale solar is still competitive with fossil fuels. Please refer to Lazard's graph below for reference.

Given the broad energy needs nationwide and the global trend towards renewable energy and competitive pricing, we feel utility providers will continue to develop solar farms, even if solar was unincentivized.

While the incoming administration has had hostile rhetoric towards the IRA, experts are unable to say if the Republicans will take legislative action against the various subsidies that buoy solar. Republican districts and rural constituents have greatly benefited from these incentives and high energy costs have also been a target of Trump's rhetoric. If no legislative action is taken, the ITC and 45X credits should further decrease solar costs until they sunset in 2035 and 2033 respectively.

Nextracker's business fundamentals have demonstrated resilience, with gigawatt shipments growing more under previous Trump policies than under the current administration.

This historical performance, combined with Nextracker's 100% domestic supply chain, mitigates policy-related risks and highlights a strong case for recovery as market sentiment stabilizes. These factors will adversely affect American-based peers who have not taken steps to protect their supply chains, and their foreign competitors who face new barriers in the American market. With approximately 70% of revenues within the United States, Nextracker is ideally positioned to benefit from a domestic-first policy environment and will also be relatively isolated from the effects of a "trade-war". If the incoming administration makes changes to the FTC as expected, Nextracker is positioned to consolidate the solar tracking industry. While Solar is expected to face headwinds broadly under the Trump administration, Nextracker is positioned to benefit greatly, which the market underestimates.

Nextracker's TrueCapture software is a key differentiator that enhances margin stability by using machine learning and real-time weather data to optimize solar panel positioning throughout the day. This dynamic adjustment increases energy production by up to 6% over traditional trackers, creating a strong return on investment for clients and supporting Nextracker's premium pricing. The system's terrain-adaptive features make it highly competitive in international markets with diverse terrains, reducing site preparation costs and helping Nextracker sustain robust gross margins even in regions where price competition is intense. This cost advantage drove an impressive 31% domestic revenue growth and 32% in the ROW segment in FY24, contrasting a 21% decline for rival ARRY. NXT is well-positioned to continue gaining share in emerging markets in the Middle East, Africa, and Southeast Asia as these markets shift from fixed-tilt to solar tracking systems.

Nextracker's R&D efforts in the AgriPV sector, which integrates solar power with agricultural activities, will create new revenue streams and boost support in agriculturally focused regions, further enhancing their competitive advantage.

The demand for energy from data centers is projected to account for 8% of U.S. power consumption by 2030, with renewables expected to supply 40% of that energy. Prevailing assumptions favor fossil fuels, causing the market to underappreciate the volume that solar's increasingly low LCOE and rapid deployment will bring to meet Big Tech's ambitious sustainability goals. With over 600 distributed generation projects already delivered—including notable installations at data centers—NXT will capitalize on this rapidly growing market, supported by its innovative technology and established partnerships with key industry players, such as the National Renewable Energy Laboratory.

Further enhancing its market positioning, Nextracker's recent acquisitions of Ojjo and Solar Pile International have enabled it to offer more comprehensive foundation solutions that appeal directly to customers and EPCs. By integrating innovative foundation technologies, these acquisitions simplify the installation process, reduce project complexity, and lower construction costs for clients. This customer-centric approach strengthens Nextracker's value proposition, making it an attractive partner for utility-scale solar projects. Management's proactive and declared intent of pursuing margin-accretive acquisitions combined with a strong balance sheet with negative net debt further enhances Nextracker's ability to maintain margins through synergistic acquisitions.

Nextracker's dependence on a few large clients creates concentration risk. The largest of note was 17% of revenues, with the top 5 consisting of 41.1% of total revenues in FY2024. This is in line with historic rates. While not explicitly stated, given their revenue breakdown, these are likely EPCs. If the EPCs continue to book new business, and continue to choose NXT, the concentration isn't a liability. The Ojjo and Solar Pile acquisitions were also efforts by NXT to increase their offerings to their clients in other areas of need.

This is also mitigated by the stability of its $4.5 billion backlog, which has shown a cancellation rate of less than 1% historically. The backlog provides revenue visibility and allows Nextracker to maintain its focus on adding clients and expanding its market presence while minimizing the impact of concentration risk. They expect to convert 90% of their backlog into revenue in the next 8 quarters. We believe cancellation risk is low due to their strict accounting regarding the backlog, as they won't count the more flexible Volume Commitment Agreements to the backlog.

In the case where the solar tracking industry is less impacted by the Trump administration as expected, price competition could increase as more players enter the solar tracking market. Additionally, regardless of policy, competitors will try to imitate Nextracker's technology. However, in the short term, Nextracker's extensive patent portfolio and proprietary TrueCapture software provide a durable competitive edge. Nextracker's superior margins allow the firm to maintain a focus on R&D and innovation, which ensures Nextracker's ability to maintain a premium product offering and reduces the risk of commoditization. The market's over-pessimism regarding NXT's margins going forward creates strong potential for upside.

As previously mentioned, concerns about changing U.S. policies on renewable energy have impacted Nextracker's share price, but the company's performance has historically shown resilience under previous Trump administration policies. Nextracker's U.S.-centered supply chain strategy provides insulation against international trade volatility, making it better positioned than peers who rely on imports. These factors, combined with Nextracker's ability to continue winning contracts in the U.S., reduce the potential impact of policy shifts.

Given Nextracker's current discount after a significant week for the rest of the market we recommend an immediate entry. This is recommended as a long position ($54 PT, 41% upside, 24-36 months), as the turbulence within the solar tracker industry, which will benefit Nextracker, will not be created immediately, as it is contingent on regulatory outcomes, tariff implementation, and renewable incentives. We must allow the proper time for these events to occur, and for Nextracker to significantly outperform their peers in the aftermath. This outperformance, as well as a potential acquisitive period, should raise valuation over the long term as Nextracker further solidifies itself as the sub-sector leader. Based on a 5-year DCF model using a ~10.5% WACC and a terminal growth rate of 2.5%, we determined a target price of $54.87. NXT trades at 9.4x P/E & 6.9x TEV/EBITDA vs. Peers (24x, 9.4x), implying 40.7%+ upside.

We recommend taking a short position Array Technologies (ARRY). As a close competitor in the solar tracker market, Array faces similar industry risks but is less diversified and has a more vulnerable position in emerging markets. Shorting Array can hedge against sector-specific downturns, particularly if Nextracker's unique strengths (e.g., extensive IP, data center expansion) help it outperform peers under similar conditions. If the entire solar tracking industry faces a decline, Nextracker may hold up better than Array due to its stronger backlog and margin resilience.

Post-Mortem & Reflection

I actually think NXT had the potential to be a very strong pitch. The long ended up playing out, we pitched it at $35 and today it sits well over $100. I think this was mostly luck. A few problems immediately come to mind when I think about my work on NXT: First, I tried to do this in too crammed of a time period (a few days). Second, I didn't dig deeply enough into understanding the types of contracts these utility scale solar EPCs and builders have with NXT. My freshman summer, I rotated within the equipment finance division at Regions Bank. For a week, I worked under the solar financing group, which directly ties to the type of people NXT works with. Later conversations with my former boss made me realize NXT's biggest barrier to entry: a proven track record. Utility scale solar projects take years, sometimes over a decade, to pan out. Having a track record and the builder knowing the tracking company will be around in 10-15 years is huge, and that's one of the reasons the sector is an oligopoly. This has also been confirmed in several TEGUS expert calls. Had I just spent more time and effort digging to find this, I think I would have found NXT to be a compelling compounder that benefits from this barrier to entry rather than a 2-3 year long. Third, my valuation and accounting skills still lacked by then, so my forecasting was very elementary and closer to guess work.

To this day, I still own NXT and think it's both a good business and a good investment. However, I initially bought the stock at $37 and sold at $55 — right around my price target — leading me to miss the majority of the upside. The lesson wasn't that I sold, but that my price target itself was too conservative because I hadn't fully understood the durability of the business. I now know to let my winners keep winning sometimes, especially when the underlying thesis is about structural competitive advantages rather than a short-term catalyst. In all fairness, my conviction on the name wasn't very high, and had my original thesis been wrong on timing, I could easily be sitting here today having lost money on NXT. I still own the stock today, which I bought back at about $90 after coming back to the name.