From seemingly every angle, Array Technologies (NASDAQ:ARRY) should be on fire. Having just had an initial public offering priced at $22, Array Technologies stock is just that, fire.
Since its debut, ARRY closed its first session at $36.45 and it’s no surprise, really. Thanks to its incredibly relevant solar tracking business, along with favorable political tailwinds, this is an organization that appears to be going places.
Since power generation became a reality, man has always looked to the sky and wondered if we could harness the infinite energy of the sun. Unfortunately, the laws of thermodynamics prevent 100% efficient translation of sunlight into practical energy. However, that hasn’t stopped scientists and engineers from concocting innovations that have made solar power integration a usable concept.
For instance, the National Renewable Energy Laboratory earlier this year fabricated a solar cell with an efficiency of almost 50%. Further, NREL.gov notes that “The six-junction solar cell now holds the world record for the highest solar conversion efficiency at 47.1%, which was measured under concentrated illumination. A variation of the same cell also set the efficiency record under one-sun illumination at 39.2%.”
Better yet, these burgeoning improvements have significant implications for Array Technologies stock. Underlining the equity is an advanced solar tracking system, which is exactly what it sounds like: a system that rotates along an axis so that the solar panels receive maximum direct sunlight. This simple but incredibly effective concept can increase electrical power generation by 10% to 25%, depending on the geographic location of the tracker system.
Therefore, the combination of improved solar technologies along with innovative mechanisms to maximize efficiency should make clean renewable energy a mainstream reality. And that’s exactly what the political winds are pushing for.
While fossil-fuel energy companies took a dim view to presidential candidate Joe Biden’s stance on fracking in the final debate, the reality is that many people, particularly millennials and Generation Z, are worried about climate change. As well, non-renewable energy may not be enough to accommodate a growing global population and thus, dramatically rising energy consumption.
Therefore, the minute and broader fundamentals for Array Technologies stock appear very positive. So, why have shares been so volatile recently?
Array Technologies Stock Not as ‘Clean’ as You Would Like
There’s very little doubt that clean energy will represent a significant component of our future energy infrastructure. The question is, how much will clean energy represent? According to the so-called Biden Plan, his administration promises that the “U.S. achieves a 100% clean energy economy and net-zero emissions no later than 2050.”
If so, that should be a boon for Array Technologies stock. But it won’t, and here’s why.
Solar energy integration comes down to a math problem. According to the U.S. Energy Information Administration, “the average annual electricity consumption for a U.S. residential utility customer was 10,649 kilowatt hours (kWh), an average of about 877 kWh per month.” That translates to 29.2 kWh daily.
Now, the average retail solar panel generates between 250 and 400 watts. Very generously, let’s assume that you get six hours of clear sunny days every day, with the maximum 400 watts of the retail spectrum. In this case, you will generate 2.4 kWh daily. Through simple arithmetic, we will need 12 of these retail panels per U.S. household to replace residential power needs through solar energy.
On paper, that sounds like a reasonable narrative for Array Technologies stock. By improving the efficiency of solar energy systems through trackers, the underlying company can reduce the surface area requirements of the industry.
Further, this makes forecasts regarding a global shift toward renewable energy seem attainable. For instance, the share of renewable energy sources in global power generation in 2019 was 13.4%. Back in 2007, it was 5.2%. At this rate, the high-end estimate by the year 2050 will be 75% while the low-end estimate will be 40%.
That’s what the math states, so what’s the problem? Well, the input in this exercise is flawed. Yes, the math checks out, but you must also account for the fact that not every region in the U.S. (let alone the world) gets six hours of daily uninterrupted sunlight. Therefore, Array Technologies stock has a geographic limitation.
Moreover, water covers 71% of the earth’s surface. So, the problem with solar math is that you eventually start running out of numbers. And even the truly terrestrial part of our earth is not always appropriate for solar, thus again limiting Array Technologies stock.
Cost Structures for ARRY Must Be Considered
Another reason why ARRY has courted some volatility is the underlying cost structure. As you might imagine, tracking systems are more expensive than stationary ones. Therefore, tracking projects require more upfront costs.
Additionally, these mechanisms have several moving parts, requiring recurring maintenance. That also adds up. Then, investors must also account for Murphy’s law. Further, as Solar Power World stated, “…if the solar tracker system breaks down when the solar panels are at an extreme angle, the loss of production until the system is functional again can be substantial. A solar tracker is also more prone to be damaged in a storm than the actual panels.”
At the same time, solar energy is currently enjoying unprecedented demand. Therefore, investors may want to consider speculating on Array Technologies stock once shares calm down. However, be aware that while ARRY’s tracker systems are compelling, they also carry financial/operational risks.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.