Heavy US Reliance Will Expose Risks And Compress Margins

Key Takeaways

• Heavy reliance on the U.S. market exposes Nextracker to geopolitical risks and policy changes, potentially impacting future revenues.
  
• Expansion and R&D investments could pressure margins if new ventures do not meet revenue expectations quickly.
  
• Strong revenue growth and a large backlog indicate robust demand and potential for future earnings, supported by efficient global operations and strategic R&D investments.

Catalysts

An energy solutions company, provides solar tracker and software solutions for utility-scale and distributed generation solar projects in the United States and internationally.

• Despite Nextracker's significant backlog and growing demand, the company's heavy reliance on the U.S. market could expose it to geopolitical risks and policy changes, potentially impacting future revenues.
  
• The company's expansion into new regions and products requires substantial R&D investment, which could pressure net margins if these new ventures do not meet revenue expectations quickly enough.
  
• The current pricing stability may not be sustainable if the competitive landscape intensifies, potentially leading to margin compression and impacting earnings.
  
• The emphasis on domestic content to meet new regulatory standards could lead to increased production costs, which might not be fully passed on to customers, thus squeezing net margins.
  
• The scalability challenges of international operations and project timing uncertainties could lead to uneven revenue recognition, impacting short-term financial performance and earnings stability.

Nextracker Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nextracker compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nextracker's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 17.2% today to 15.1% in 3 years time.
• The bearish analysts expect earnings to reach $596.0 million (and earnings per share of $3.83) by about July 2028, up from $509.2 million today. The analysts are largely in agreement about this estimate.
• 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 13.8x on those 2028 earnings, down from 18.3x today. This future PE is lower than the current PE for the US Electrical industry at 28.7x.
• Analysts expect the number of shares outstanding to grow by 1.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Nextracker Future Earnings Per Share Growth

Risks

• Nextracker has achieved a strong revenue growth of 15% year-over-year, showing robust demand for its products and services, which may positively impact net revenue and contribute to financial stability.
  
• The company reports a record backlog exceeding $4.5 billion, suggesting future revenue visibility and potential enhancements in earnings due to secured contracts and continued demand.
  
• Nextracker's significant investments in R&D and expansion in multiple regions highlight its commitment to innovation, potentially leading to improved product offerings and increased future revenue streams.
  
• The stability and efficiency of Nextracker's global supply chain, especially in leveraging domestic content, may improve cost management and support stable profit margins despite external economic pressures.
  
• The company has maintained a high adjusted EBITDA margin of 27%, reflecting operational efficiency and strong profitability, which could support earnings growth if maintained or improved in subsequent quarters.

Valuation

• The assumed bearish price target for Nextracker is $41.88, which represents two standard deviations below the consensus price target of $65.82. This valuation is based on what can be assumed as the expectations of Nextracker'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 $97.0, and the most bearish reporting a price target of just $35.56.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $596.0 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 8.0%.
• Given the current share price of $62.95, the bearish analyst price target of $41.88 is 50.3% lower. Despite analysts expecting the underlying buisness 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.