Supply Constraints And Concentration Will Impede Output Yet Foster Diversification

Key Takeaways

• Heavy reliance on a few major contracts and gas turbine technology exposes Solaris to customer concentration, regulatory, and compliance risks as the energy landscape evolves.
  
• Supply chain constraints, rising competition from renewables, and project permitting risks may pressure margins, limit near-term growth, and reduce revenue stability.
  
• Heavy reliance on a small customer base, supply chain bottlenecks, industry decarbonization trends, and exposure to commodity cycles threaten Solaris' growth, utilization, and earnings stability.

Catalysts

Provides 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.

• While Solaris has secured significant long-term power generation contracts with a leading AI/data center customer, the company faces a high degree of customer concentration risk, as future revenue growth remains heavily dependent on a small number of large contracts and limited diversification across other segments may increase volatility in earnings if demand from key customers wanes.
  
• Despite ongoing strength in demand for infrastructure supporting data center electrification and manufacturing reshoring, tightening supply chains for critical power generation equipment have led to longer lead times and potential constraints on Solaris's ability to deploy new capacity, which could ultimately cap near-term revenue expansion and compress margins if costs rise faster than anticipated.
  
• Although the global push for decarbonization is expanding the need for reliable, dispatchable energy and grid modernization, Solaris's current reliance on gas turbine technology may expose the company to increasing regulatory scrutiny and compliance costs, which could pressure net margins over the longer term if carbon policies shift rapidly.
  
• While Solaris benefits from take-or-pay, long-term contracts that provide some earnings stability, its logistics business is susceptible to cyclical softness in oil-directed activity and commodity prices, which could limit cash flow generation and dampen consolidated EBITDA during industry downturns.
  
• Despite ongoing investment in automation, integration, and efficiency initiatives to improve operating leverage, the ability to maintain sustainable margin expansion could be challenged by rising competition from integrated renewable and distributed energy providers, as well as by the risk of project delays stemming from land use, permitting, or public opposition, which could negatively impact revenue visibility and growth.

Solaris Energy Infrastructure Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Solaris Energy Infrastructure compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Solaris Energy Infrastructure's revenue will grow by 41.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.3% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach $56.3 million (and earnings per share of $1.66) by about July 2028, up from $15.8 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 57.4x on those 2028 earnings, down from 76.5x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• 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 7.2%, as per the Simply Wall St company report.

Solaris Energy Infrastructure Future Earnings Per Share Growth

Risks

• Solaris' Power Solutions segment is highly concentrated with one large data center customer, and management highlighted a need to increase customer diversification, so overreliance on a single fast-moving client could amplify earnings volatility and revenue risk if demand weakens or partnership circumstances change.
  
• The company's ability to rapidly secure new turbine capacity is increasingly constrained by tightening supply chains and limited manufacturing slots, meaning long-term fleet expansion is likely to face extended lead times and may limit Solaris' growth rate and future revenue opportunities versus peers with greater technology or supplier diversification.
  
• Solaris relies on natural gas-powered generation for its Power-as-a-Service platform; as electrification trends accelerate and larger users shift to direct renewables and batteries, secular decarbonization and ESG investor preference may erode demand for gas-fired solutions, pressuring Solaris' medium and long-term utilization rates and net earnings.
  
• The Logistics Solutions segment is exposed to commodity price softness and oilfield activity cycles, with recent commentary emphasizing operators delaying jobs in response to weaker oil prices, so any prolonged downturn in energy markets could reduce segment revenues and overall cash flow contribution.
  
• As Solaris ramps up its large fleet and takes on significant CapEx and joint venture debt, the lack of a broad long-term contracted customer base and reliance on a mix of uncontracted or shorter-term assets could result in lower-than-anticipated fleet utilization and greater margin compression if mid-cycle power demand or pricing deteriorates.

Valuation

• The assumed bearish price target for Solaris Energy Infrastructure is $32.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Solaris Energy Infrastructure'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 $53.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $56.3 million, and it would be trading on a PE ratio of 57.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $29.88, the bearish analyst price target of $32.0 is 6.6% 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.