Solar Tracker Demand And Domestic Content Rules Will Expose Structural Weaknesses Ahead

Catalysts

About FTC Solar

FTC Solar designs and supplies single axis solar tracker systems and related software to utility scale solar developers and EPCs.

What are the underlying business or industry changes driving this perspective?

• The accelerating build out of large scale solar globally is increasing demand for trackers, yet FTC Solar remains a late stage challenger with limited share and heavy dependence on winning a small slice of top developer projects. Any slowdown in project starts or failure to displace entrenched rivals could stall revenue growth and leave fixed costs underabsorbed, pressuring earnings.
• The industry shift toward higher voltage systems, more complex grid interconnection and sophisticated O&M requirements favors scale players with broader product and service ecosystems. This creates a risk that FTC Solar's narrow tracker centric focus will cap pricing power and compress gross margins as it competes mainly on installation speed and cost.
• Growing domestic content rules and evolving interpretations of 45x and other incentives could force further investment in Alpha Steel and the U.S. supply chain. Underutilization, execution missteps or regulatory changes would turn expected COGS savings into lower margins and weaker free cash flow.
• Structural labor shortages and the push toward robotic construction are raising technical and capital requirements for next generation tracker platforms. If FTC Solar fails to commercialize and scale its automation friendly designs ahead of peers, it risks losing high value projects and seeing revenue growth decelerate just as operating expenses and R&D needs rise.
• The rapid expansion of long term MSAs and pipeline in both U.S. and international markets increases exposure to project delays, tariff shifts and counterparty risk. If a meaningful portion of these gigawatts do not convert to timely, profitable bookings, expected revenue growth and the path to sustainable positive adjusted EBITDA could prove overly optimistic.

Assumptions

This narrative explores a more pessimistic perspective on FTC Solar compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming FTC Solar's revenue will grow by 45.8% annually over the next 3 years.
• The bearish analysts are not forecasting that FTC Solar will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate FTC Solar's profit margin will increase from -69.3% to the average US Electrical industry of 11.8% in 3 years.
• If FTC Solar's profit margin were to converge on the industry average, you could expect earnings to reach $29.3 million (and earnings per share of $1.6) by about December 2028, up from $-55.4 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.1x on those 2028 earnings, up from -2.6x today. This future PE is lower than the current PE for the US Electrical industry at 31.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Utility scale solar demand and the global tracker market could continue to expand rapidly, and FTC Solar's differentiated 1P independent row architecture, installation speed and labor saving design may allow it to capture a structurally higher share of new projects, supporting sustained top line growth and a stronger revenue trajectory than expected, positively impacting revenue and earnings.
• The company is demonstrating clear operational leverage, with quarterly revenue up 160% year over year, gross margins turning positive and adjusted EBITDA losses narrowing to their best level in five years, and if this trend continues alongside growing contributions from Alpha Steel and 45x credits, net margins could improve faster than anticipated, boosting earnings.
• Long term master service agreements now exceeding 7.5 gigawatts, expanding pipelines in the U.S. and internationally and increasing access to top tier developers and EPCs could convert into a more predictable, higher quality backlog, reducing cyclicality and driving steadier revenue growth and improving earnings visibility.
• Full ownership of Alpha Steel and continued optimization of a global supply chain geared toward domestic content and tariff flexibility may structurally lower cost of goods sold and enhance eligibility for incentives, which would support higher gross margins and stronger free cash flow, improving net margins over time.
• Industry wide labor shortages and the secular shift toward robotic construction and higher voltage 2,000 volt systems appear to favor FTC Solar's highly constructible, automation friendly platform, so if that technology edge widens and adoption accelerates, the company could see outsized pricing power and volume growth, raising revenue and expanding earnings beyond bearish expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for FTC Solar is $5.0, which represents up to two standard deviations below the consensus price target of $10.62. This valuation is based on what can be assumed as the expectations of FTC Solar's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $247.9 million, earnings will come to $29.3 million, and it would be trading on a PE ratio of 4.1x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $9.59, the analyst price target of $5.0 is 91.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.