Array Technologies (NASDAQ:ARRY) has a valuable product and is growing rapidly. Moreover, it’s in the solar sector, which is likely to expand tremendously in coming years. But given the relatively high valuation of Array Technologies stock, along with uncertainty tied to the upcoming U.S. presidential election, I believe that investors should wait for a pullback before buying shares.
Array develops and markets solar trackers which ensure that solar panels are optimally aligned with the sun. Unlike its competitors, whose trackers use multiple motors, Array’s systems run on only one motor. Additionally, Array says that its technology is more reliable and cheaper than that of its competitors.
Indicating that its assertions about the strengths of its products are correct, the company is growing rapidly. Specifically, in 2019 its revenue jumped 122%, and its top line has surged 145% in the first six months of this year to $552 million.
Additionally, operating profits for the first six months of this year came in at almost $103 million. That number is already above the same metric for the entire span of 2019. And a Seeking Alpha columnist estimates that Array will generate earnings per share of $1.20 this year.
Meanwhile, research firm Wood McKenzie has estimated that the use of solar energy will surge 37% in the U.S. in 2020, and the International Energy Agency recently declared that solar would become the “king of electricity.” The organization predicted that worldwide solar installations would increase by an average of 12% annually going forward.
Valuation Is an Issue for Array Technologies Stock
The market capitalization and price-sales ratio of Array Technologies stock are significantly higher than those of some major solar energy companies. For example, Array’s market capitalization of $5.3 billion is meaningfully above JinkoSolar’s (NYSE:JKS) $2.9 billion and Canadian Solar’s (NASDAQ:CSIQ) $2.4 billion. And Array’s trailing price-sales ratio is 5.1 times, versus 0.6 times and 0.76 times for JinkoSolar and Canadian Solar, respectively.
Solar inverter makers Enphase (NASDAQ:ENPH) and SolarEdge (NASDAQ:SEDG) have much higher market capitalizations and price-sales ratios than Array. But Enphase and SolarEdge also have meaningfully higher gross margins than Array. Specifically, Enphase’s gross margin so far this year is over 37%, while SolarEdge’s gross margin is 33% and Array’s gross margin this year is 25%.
Investors tend to give companies with higher gross margins much larger valuations.
The conventional wisdom is that former Vice President Joe Biden, who plans to spend trillions of dollars on making the U.S. greener, will win the upcoming presidential election. Lately, however, the polls have been tightening. Further, Biden is only 0.2 percentage points ahead, on average, in swing-state polls compared to former Secretary of State Hillary Clinton in 2016.
In fact, I believe that the large decline in solar stocks earlier this week was primarily due to a broad realization that Trump could win the election. And if he is reelected, these names are likely to drop another 15%-25% over the subsequent two weeks.
Meanwhile, if Biden wins, they probably will not gain much more than 10%-15%. Why? I believe they’re already pricing in a 70%-80% chance of a Biden victory.
The Bottom Line on Array Technologies Stock
In a recent article on Array, InvestorPlace analyst Matt McCall called Array “a bit too hot to touch.” He added that “on a pullback, consider this a screaming buy.”
I agree with that view.
The company has a huge, longer-term opportunity, but its valuation is currently too steep. Further, the risk-reward ratio of Array Technologies stock ahead of the U.S. election is negative. Therefore, I would advise investors to look to buy the shares after the election for around $32-$33.
On the date of publication, Larry Ramer held a long position in JinkoSolar.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.