Amid the volatility in 2020, there have been notable IPOs, such as the solar company Array Technologies (NASDAQ:ARRY) stock. On Oct. 15, ARRY stock opened at $29.50. Now, it is hovering at $42.
The shares have caught the attention of potential investors, who wonder if the strength in share price can continue in the final quarter of the year. We believe the company is likely to be a long-run beneficiary of the growth in alternative energy systems, such as solar power. However, given the recent run-up in price, valuation has become expensive. Market participants may consider waiting for a pullback before committing fresh capital into Array Technologies stock. Here is why.
The Importance of Solar Energy Is Growing
According to the International Energy Agency (IEA), “Solar energy is the conversion of sunlight into usable energy forms. Solar photovoltaics (PV), solar thermal electricity and solar heating and cooling are well established solar technologies.” In terms of electric generating capacity in the U.S., solar’s share is currently 3%. Between 2019 and 2026, the sector is expected to grow at a compound annual growth rate (CAGR) of 20.5%.
Array Technologies, which was founded in 1989, regards itself as a global leader in single-axis solar tracking. In addition to presence across the U.S., the company has operations in over 30 other countries.
Researchers highlight, “Improving the efficiency of solar panels is the main task of solar energy generation. One of the methods is a solar tracking system… Currently, solar trackers are divided into two main groups depending on their rotation mechanism: single-axis trackers and two-axis trackers. Both groups increase the efficiency of solar cells.”
A recent study cites solar assets have a running life of over 30 years and “Array Technologies’ Single-axis Trackers Shown to have over 7% Lower Lifetime Costs.” Therefore, potential investors have been quite enthusiastic about the prospects for the company and the ARRY share price.
How Array Technologies Stock Makes Money
On Oct. 16, the Albuquerque, New Mexico-based Array Technologies filed its Form 424B4 with the U.S. Securities and Exchange Commission (SEC).
Management noted, “Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate up to 25% more energy and deliver a 22% lower levelized cost of energy (“LCOE”) than projects that use “fixed tilt” mounting systems, according to BloombergNEF. Trackers represent between 10% and 15% of the cost of constructing a ground-mounted solar energy project, and approximately 70% of all ground-mounted solar energy projects constructed in the U.S. during 2019 utilized trackers according to BloombergNEF and IHS Markit, respectively.”
Put another way, the future looks bright for solar trackers. In 2019, the company generated 87% of its revenue from the U.S. The group markets its products to sell our products to engineering, procurement and construction firms (EPCs) that build solar energy projects as well as to utilities and solar developers. Array Technologies typically signs master supply agreements or multi-year procurement contracts with these clients.
As of Sept. 30, 2020, the company had $703 million of “executed contracts and awarded orders …with anticipated shipment dates in 2020 and 2021, representing a 31% increase” YoY.
For the six months ended June 30, its revenue was %552.63 million. A year ago, it had been $225.42 million, representing an increase of over 145%. For the first half of 2020, net income came at $76.08 million. A year ago, the company had a loss of $5.22 million.
The Bottom Line
Alternative energy has been one of the hottest sectors of 2020 and the new decade will possibly see further growth. As a result, Array Technologies stock will likely do well in the long-run.
However, due to the recent run-up in price since the IPO in mid-October, its valuation is expensive. Its trailing P/E, P/B, and P/S ratios stand at 134.19, 12.89, and 5.47, respectively. Potential investors would benefit from a likely pullback in Array Technologies stock, which may happen in the coming weeks.
Alternatively, investors who are interested in solar technologies and clean energy shares may also benefit from researching and possibly investing in various exchange-traded funds (ETFs), including the Invesco Solar ETF (NYSEARCA:TAN), the First Trust NASDAQ Clean Edge Green Energy Idx Fd (NASDAQ:QCLN), and the VanEck Vectors Low Carbon Energy ETF (NYSEARCA:SMOG).
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.