Nextracker Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Nextracker Inc. is a leading global provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar power plants, primarily operating in the United States, Brazil, Australia, Mexico, Spain, and other countries in Europe, India, the Middle East, and Africa.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nextracker’s core business revolves around manufacturing, integrating, and delivering solar tracking and software solutions.

  • Revenue Streams: The majority of Nextracker’s revenue is derived from the sale of its solar tracker systems to customers, primarily EPCs, developers, and installers of solar projects.

While the company also generates income from software, maintenance, upgrades, and other services, these revenue streams are not yet as significant as sales of tracker systems.

*   The split of revenue by geography has shifted over the past 2 years, with the US accounting for more revenue than the rest of the world, which historically had the lions share. *   **Industry Trends:**
 *  The solar industry is driven by a global push for decarbonization and renewable energy sources.
 *  Demand for solar power is growing rapidly, particularly in utility-scale projects, where Nextracker's products excel.
*   The industry is also seeing increased adoption of intelligent tracking systems, as they boost energy production by optimizing the position of solar panels throughout the day.
*   Technological advancements in AI-powered energy solutions are expected to drive greater automation and improvements.

  • Competitive Landscape:

  • The solar tracking industry is characterized by significant competition among many players, ranging from larger publicly-traded companies to smaller firms focusing on niche markets.
  • While Nextracker has established a prominent position in the industry, it faces competition from global manufacturers as well as companies focusing on specific niches. * The company identifies Array Technologies, PV Hardware and Arctech as its main competitors. * In Q3 2023 call, Nextracker has mentioned that its supply chain and sales continue to be very strong, but competitors are experiencing delays and inventory build up.

  • Competitive Differentiators:

    • Scale and Market Share: Nextracker has claimed the leadership position as the leading global supplier of solar trackers for several years, indicating a strong market position.
      • This scale allows the company to enjoy cost advantages that other smaller players cannot replicate.

    • Technology and Innovation: Nextracker has invested in innovative technologies, such as self-powered trackers and advanced software that uses AI, which helps to optimize the output of the solar plants they are used in.

    • Nextracker continues to invest in research and development (R&D) to enhance its products’ performance, reliability, and ease of deployment.
      • As of March 31, 2023 they have 26 issued patents in the US and 20 US patent applications pending, as well as several patents pending outside the US.

    • Global Presence and Supply Chain: Nextracker operates on a global scale, with facilities in multiple countries, allowing it to serve diverse markets and leverage cost-effective supply chain and manufacturing.

    • Customer relationships: They focus on customer relationship, with over 200 clients and a high repeat business model.
    • Software Integrations: Their software and monitoring is very specialized for the clients.
      • They’re focused on improving energy and labor cost efficiency.
  • Recent Concerns/Controversies/Problems:
  • A recent concern has been the impact of the US Federal Government regulations regarding domestic production requirements, which could affect the company’s supply chain.
    • The company is taking steps to implement those requirement and is exploring diverse manufacturing and supplying locations.
  • Although, Nextracker hasn’t seen meaningful impact in prices of their raw materials, there are some general supply chain risks that could impact their profitability.
  • They mention that they are still monitoring the impact of US export regulations, but it is not material right now.
    • Tariffs and trade policies in general are also a concern for future revenue generation. * There has been recent changes in trade policy with China, including anti-dumping and countervailing duties against crystalline silicon solar cells and modules. Nextracker states that those will impact its prices.

Financial Deep Dive

  • Revenue Growth: The company has demonstrated robust revenue growth in recent years. As of the first quarter of 2024 they have reported 33% YoY increase in revenues and has reached over $1.5 billion in revenue, showing tremendous growth.
  • Gross Margins: Gross margins has been maintained around 20% and it is expected to remain in this region. The company has seen their gross margins dip recently due to shipping constraints and a change in product mix with more high-cost products being shipped.

  • Operating Expenses: The company has been steadily increasing its operating expense in R&D, but it sees it as a part of its business strategy that will help it further its competitive advantage and keep its moat durable over time.

  • Profitability: Despite revenue growth, profitability is still an issue because of high operating costs. This implies a substantial runway for profitability as the company improves efficiencies.
  • Cash Flow: Net cash provided by operating activities has been steadily increasing over the years and as of Q3 2023 the company has a net cash flow of $178.7 million. This is a huge improvement compared to previous periods where net cash was almost zero.
  • Balance Sheet: The company has a strong balance sheet, with ample cash and equivalents. The liabilities to asset ratio has been declining over the past 3 years, indicating that the business is becoming less risky with time.
    • Cash position of $538.4 in March 2023
    • Trade receivables of $571.4 million
    • Total debt of $312.5 million
  • Capital Expenditures: The company has shown an increase in capital expenditure over the past years as it expands its manufacturing facilities and infrastructure. The cash flow provides enough cover to finance these expenditures and there isn’t any considerable effect on its financials.

Moat Assessment: 2/5

  • Intangible Assets: While the company does have intellectual property, their patents can expire or be challenged by competition. Even though they have a strong brand as of now, this brand can be easily eroded. Therefore, tangible assets aren’t the primary driver of their moat, even though they play an important part in them.

  • Switching Costs: While there are some minor switching costs through software integration, the switching costs of this business are not extremely high. Their customers might not like to change, but it’s a possibility as most of the clients also have different providers and prefer options.

  • Network Effect: There are no network effects for Nextracker that can provide a competitive advantage.

  • Cost Advantages: Nextracker’s manufacturing scale and location of production gives them some cost advantages compared to smaller players, which is a notable but not extremely strong factor in its moat. The globalized manufacturing base does give them some advantage but it can easily be replicated by other firms.

  • The company’s vertical integration and cost advantages with specialized manufacturing techniques are helpful to reduce costs further, but are not a primary driver for its profitability.

  • Overall: Taking all the factors above into account, the moat seems to be on the lower side, with a rating of 2/5. The business can be profitable for many years if it can maintain a slight lead on its competitors and also if industry continues to grow, but a substantial moat isn’t fully formed.

Risk Factors

  • Competition: The solar tracking industry is highly competitive and new players can enter the market, which could erode Nextracker’s competitive position.
  • While Nextracker’s technology is advanced, new technological advancements could pose a threat if the company does not keep up to it.
  • Global Supply Chain: The company relies on a global supply chain for many of its components, which may be exposed to disruption from various factors.
  • These include factors like trade wars, geopolitical tension or natural disasters.
  • Price Volatility of Raw Materials: Increasing cost of raw material, such as steel, can also increase costs and reduce profitability.
  • Regulations: Nextracker may be affected by new or existing regulations related to trade, tax laws, and incentive programs.
  • The government changes regarding tax credits and new subsidies may impact demand and sales.
  • Especially the US government subsidies are very impactful to its performance.
  • Economic conditions: A downturn in global economic conditions could negatively affect the demand and profitability of the company.
  • Technological Obsolescence: The rapid pace of technological advancements may make the company’s products less competitive or obsolete.
  • Debt levels: A substantial level of debt could have an adverse impact on the company, in a highly volatile market.

Balance Sheet Health: 4/5

  • Cash Position: The company has a strong cash position, with $538.4 million as of March 2023.
  • Low Debt: Total debt is at a manageable level, given the cash on hand and strong cash flows, with debt equity ratio at around 0.3-0.4.
  • Good Asset base: Their total current assets are at $1.3 billion and they continue to grow.

Understandability: 3/5

While the business itself is easy enough to understand, understanding all the nuances behind the financial statements may be complex. Here’s a rating of 3/5.

  • The company operates in a technology-driven market and understands its position among competitors.
  • However, it does take some time and experience to understand its financials and financial implications in different scenarios.
  • Although, the business is not as easy to understand as a consumer products company but it is not very technical either.
  • It’s an industrial business which isn’t simple to understand. It also has contracts based revenue streams which adds more complexity.