Global R&D Expansion And Strong Solar Demand Will Strengthen Position, But Profit Margins May Decline

Key Takeaways

• Strategic R&D expansion and partnerships reinforce Nextracker's leadership in solar technology, positively impacting long-term revenue and growth.
  
• Strong demand and localized supply chain enhance competitive advantage, boosting U.S. market share and financial performance.
  
• Geographic concentration risk in the U.S. market and international pricing pressures could strain profitability and influence overall financial performance.

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.

• Nextracker's global expansion of R&D facilities in the U.S., Brazil, and India, along with the partnership with UC Berkeley for solar technology research, is expected to reinforce its commitment to innovation and position the company as a leader in solar technology, impacting long-term revenue and growth.
  
• The record backlog exceeding $4.5 billion, with continued strong demand and bookings indicates excellent visibility and confidence in future revenue growth, providing a solid foundation for future financial performance.
  
• Strategic investments in supply chain localization, such as their 100% U.S. domestic content products, afford Nextracker a competitive advantage, potentially enhancing market share and revenue in U.S. markets.
  
• The sustained global demand for solar power, coupled with Nextracker's ability to deliver innovative products like TrueCapture software and XTR trackers, could result in increased sales and better margins due to higher efficiency and energy yield capabilities.
  
• The anticipated increase in U.S. power demand and the dominance of solar energy in new capacity additions create favorable market conditions for Nextracker's products, potentially driving up revenue and earnings.

Nextracker Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nextracker's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $426.2 million (and earnings per share of $2.95) by about January 2028, down from $483.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $491.6 million in earnings, and the most bearish expecting $381 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 11.8x today. This future PE is lower than the current PE for the US Electrical industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Nextracker Future Earnings Per Share Growth

Risks

• There are ongoing uncertainties regarding tariffs and domestic content requirements which could affect pricing and supply chain stability, thus potentially impacting revenue and gross margins.
  
• The competitive nature of international markets, with its emphasis on CapEx and cost reductions, could put pressure on pricing and margins outside the U.S., which may affect overall profitability and net earnings.
  
• The reliance on a significant portion of revenue from the U.S. market emphasizes geographic concentration risk; any market downturn or policy change in the U.S. could adversely affect revenues and EBITDA.
  
• The complexity and variability of large-scale projects could lead to delays or changes in project timing, affecting revenue recognition and cash flow stability.
  
• While innovation is a focus, the heavy investment in R&D could strain near-term financial performance if revenue growth does not align with the costs, impacting net earnings and shareholder value.

Valuation

• The analysts have a consensus price target of $51.87 for Nextracker based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $69.0, and the most bearish reporting a price target of just $31.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $426.2 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $39.62, the analyst's price target of $51.87 is 23.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.