Investors who bet on green energy in 2020 benefitted immensely from the highs those stocks achieved. That is, until the bottom fell out.

Since reaching their highs, U.S. solar stocks have dropped by over 50%. Meanwhile, the S&P 500 has surged around 80% in the past five years.

Moreover, the current U.S. policy landscape has not done this sector any favors, as the solar industry incentives and tax credits that have helped prop up this sector are already on the chopping block.

Yet despite these developments casting doubts on solar, the long-term outlook for this industry remains bright.

According to the Federal Energy Regulatory Commission (“FERC”), solar accounted for more than 80% of new U.S. generation capacity placed in 2024. Globally, solar was estimated to have added more than twice the electricity generation as other energy sources.

With demand for energy skyrocketing, partly driven by the artificial intelligence (“AI”) boom’s need for power-hungry data centers, solar looks poised to become a beneficiary as hyperscalers look for the energy they need to keep their data centers running.

Solar power is desirable to tech firms looking for power, regulators, and investors because it provides a low cost of ownership, fast deployment speed, and clean emissions.

Moreover, the sector has matured to the point where it can offer competitive prices without relying on subsidies.

With improvements in battery storage systems and the energy grid in store, solar appears on a path to a more reliable and consistent energy source.

As a result, companies exposed to the right spaces in the solar landscape, namely those not competing in commodity areas, can see significant upside going forward.

Nextracker (NXT) is well-positioned to capitalize on this trend, regardless of where solar panels are being installed.

The company is a leading solar tracking technology company in regions such as North America, Latin America, Oceania, and now, Europe.

It designs different tracking systems and software that allow solar panels to follow the sun, thrive in difficult terrain, optimize solar plant performance through data monitoring and collection, and more.

Nextracker’s innovation strategy focuses on incorporating technology that helps to lower the cost for customers, speed up construction timelines, and improve performance and long-term reliability of solar operations.

By being able to meet customer needs, the company has amassed substantial demand for its products and offerings.

At present, the firm’s remaining performance obligations (“RPOs”), otherwise known as backlogs, hovers at around $4.75 billion, which amounts to around 1.5x of its revenue last year.

Consequently, this indicates the company has ample breathing room to navigate the short-term effects of unfavorable policy shifts should these occur.

Due to the company’s highly differentiated products and offerings that represent a small portion of the overall cost of a solar plant, Nextracker has generated a Uniform return on assets (“ROA”) of 70%+ in each of the past two years. And last year, it delivered a Uniform asset growth of 13%.

Nextracker is showing signs that it can further extend its growth runway, as it has leveraged its technological and market position, international expansion, and new product launches to grow at around 20% year-over-year, to go along with 27% growth internationally.

Meanwhile, with a larger installed base and more software and tracking system upgrades, the firm has been able to expand its profitability.

With new growth initiatives focused on integrating AI into its tracker systems and leveraging advanced robotics, Nextracker appears poised to continue to find ways to create value for both existing customers and new constructions.

Yet despite this, the company trades at just a 17.4x Uniform P/E, well below historical averages. This discounted valuation signals that the market is concerned about industry-wide volatility brought on by unfavorable policy shifts regarding renewable energy.

However, the solar industry is showing signs of life. Solar energy is making a comeback not because of policy reassessments but because of the sheer demand for energy globally.

As a result, this resurgence could further accelerate Nextracker’s performance.

The firm has positioned itself to capitalize on this tailwind, and recent increases in its revenue guidance points signals a boost in its near-term prospects.

With all this in mind, Nextracker could warrant significant upside for investors.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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