Rising Global Regulation And Competition Will Undermine Solar Prospects

Key Takeaways

• Regulatory shifts, supply chain disruptions, and a reliance on costly domestic sourcing threaten margins, revenue stability, and long-term earnings quality.
  
• Heightened competition, customer concentration, and product commoditization may cap growth, compress margins, and increase earnings volatility.
  
• Secular growth in renewables, strong order momentum, and diversification into new markets and solutions position Shoals for expanding margins and sustained long-term earnings growth.

Catalysts

Provides electrical balance of system (EBOS) solutions and components in the United States and internationally.

• Shoals Technologies Group faces substantial long-term risk from global shifts in regulation and trade policy, including rising geopolitical protectionism and stricter sourcing rules, which could significantly increase input costs, disrupt its supply chain, and erode gross and net margins if domestic alternatives remain expensive or in short supply.
  
• Intensifying competition from both emerging alternative energy sources, such as next-generation batteries and nuclear, and low-cost international solar hardware manufacturers threatens to cap growth in Shoals' core utility-scale solar market, reducing pricing power and leading to margin compression and sluggish revenue growth in the outer years.
  
• The company's strategic push into new international markets and verticals could be undermined by political swings away from renewable subsidies and unfavorable regulatory changes in key regions, risking a shrinking addressable market and greater volatility in revenue as global policy frameworks shift.
  
• A growing reliance on a handful of large EPC and developer customers exposes Shoals to elevated customer concentration risk, so the loss or pullback of a major account could result in abrupt downturns in revenue and significant earning volatility.
  
• The ongoing commoditization of Shoals' core EBOS and BOS offerings, along with the need for escalating R&D expenditures to keep up with disruptive innovations and evolving customer requirements, could pressure earnings and free cash flow, especially as projects with lower margins and higher warranty/remediation costs form a larger portion of the future backlog.

Shoals Technologies Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Shoals Technologies Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Shoals Technologies Group's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.3% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach $60.5 million (and earnings per share of $0.35) by about August 2028, up from $21.1 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 14.5x on those 2028 earnings, down from 37.4x today. This future PE is lower than the current PE for the US Electrical industry at 30.6x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Shoals Technologies Group Future Earnings Per Share Growth

Risks

• Shoals Technologies Group is experiencing record backlog and awarded orders, with $540.3 million scheduled for shipment over the next four quarters and continued high book-to-bill ratios, which may drive revenue growth and underpin long-term earnings potential.
  
• The accelerating demand for utility-scale solar and battery energy storage solutions, including strong customer engagement with new product lines and the increasing power needs of data centers and AI, suggests their total addressable market and order pipeline may expand, positively impacting future revenues.
  
• The company's strategic initiatives-such as operational automation, factory consolidation, and expansion into new verticals like BESS and international markets-are likely to enhance cost efficiencies and margin profiles, which could strengthen net margins and drive earnings growth over multiple years.
  
• Growing customer diversity, entry into previously underpenetrated market segments, and successful conversion of customers to higher-value solutions may enable Shoals to gradually increase gross margins as initial promotional pricing strategies transition to higher-margin product sales, supporting stronger profitability over time.
  
• Favorable secular trends in global renewables adoption, power infrastructure upgrades, and persistent electrification are expected to continue driving demand for Shoals' products, creating multi-year visibility for revenue growth and operational leverage that can improve both earnings and free cash flow as remediation and CapEx requirements decline.

Valuation

• The assumed bearish price target for Shoals Technologies Group is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Shoals Technologies Group'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 $11.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $532.7 million, earnings will come to $60.5 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $4.72, the bearish analyst price target of $4.0 is 18.0% 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.