Expanding Power Capacity To 1,400 MW Will Improve Future Prospects

Key Takeaways

• Strategic investments and partnerships enhance revenue stability, improve net margins, and reduce risk through joint ventures and increased power generation capacity.
  
• Operational synergies and aggressive contract pursuits aim to significantly enhance efficiency and future earnings potential.
  
• Execution risks from rapid growth and reliance on key contracts, supply chain stability, and joint ventures could impact profits and financial stability.

Catalysts

Engages in the provision of mobile and scalable equipment-based solutions for use in distributed power generation and management of raw materials used in the completion of oil and natural gas wells in the United States.

• Solaris Energy Infrastructure has invested in its power solutions strategy, which includes a significant increase in power generation capacity, from 150 megawatts to an expected 1,400 megawatts by early 2027. This expansion is likely to boost future revenue significantly.
  
• The company announced new long-term contracts, including a strategic partnership for a minimum of 500 megawatts for a new data center over six years. Such contracts enhance revenue visibility and stability.
  
• Solaris is forming a joint venture with a key customer, aligning interests and possibly securing long-term earnings through joint ownership of power plant equipment. This initiative is likely to improve Solaris's net margins and reduce risk.
  
• The company is achieving operational synergies by integrating its power and logistics teams, which could lead to improved efficiencies and cost savings that positively impact net margins.
  
• Solaris is aggressively pursuing contracts that could nearly double its adjusted EBITDA once its fleet is fully deployed, enhancing future earnings potential.

Solaris Energy Infrastructure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solaris Energy Infrastructure's revenue will grow by 38.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $232.0 million (and earnings per share of $3.07) by about March 2028, up from $14.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 57.2x today. This future PE is greater than the current PE for the US Energy Services industry at 12.6x.
• 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 8.5%, as per the Simply Wall St company report.

Solaris Energy Infrastructure Future Earnings Per Share Growth

Risks

• The rapid expansion and aggressive growth strategy of Solaris Energy Infrastructure, particularly in its power solutions segment, introduces execution risks that could impact future earnings if the company cannot efficiently integrate or manage new assets and contracts.
  
• Significant capital expenditure and new order placements for expanding power generation capacity depend on timely delivery and operational readiness. Any supply chain disruptions or delays in equipment, such as gas turbines, could affect revenue projections and cash flow.
  
• The heavy reliance on data centers and industrial customers for power solutions involves customer concentration risk. If key contracts or partnerships, like the recently announced deals, were not renewed or failed, it could severely affect Solaris' revenue streams and financial stability.
  
• The ambitious push towards “Power as a Service” requires expertise and quality service delivery. Any missteps or problems in reliability, especially in volatile energy markets or with power grid dependencies, could damage reputation and future revenue prospects.
  
• The substantial commitment to joint ventures (JVs) for power management entails financial implications and alignment of interests. Misalignment or operational conflict within these JVs could hamper profitability metrics and shareholder returns.

Valuation

• The analysts have a consensus price target of $46.5 for Solaris Energy Infrastructure 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 $52.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $838.0 million, earnings will come to $232.0 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $22.23, the analyst price target of $46.5 is 52.2% higher.
  
• 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.