Array Technologies (NASDAQ:ARRY) is a play on the solar sector, and that sector has moved higher over the past four years — despite President Donald Trump’s benign neglect. What’s more, it’s natural to believe that the likely Joe Biden administration will be friendlier to solar and other renewable energy sectors. But does that mean it’s time to dive into Array Technologies stock? I’m not so sure.
To be completely transparent, I didn’t know much about Array until I researched for this article. But here’s what I found out.
This company is a pure-play in the solar sector. However, it doesn’t make the panels themselves. Instead, Array makes trackers, which are integrated systems that move solar panels throughout the day. Using this technology, solar panels can capture as much energy as possible. For context, fellow InvestorPlace contributor Thomas Yeung writes that solar panels installed on trackers “can generate up to 25% more energy than stationary ones.”
There are a number of competitors in this space. However, Array appears to have a competitive advantage because its trackers only use one motor. So, why am I so skeptical?
Array Technologies Stock Went Too Far, Too Fast
One of the concerns I have with buying Array at the moment is that the stock is still in the halo of its initial public offering (IPO). To be clear, I have nothing against dabbling in IPO stocks. However, prior to Array’s recent price spike, the stock was down significantly from its post-IPO high.
What’s more, Yeung did a little back-of-the-envelope math that shows me the long-term outlook for Array Technologies stock pushes pretty close to its $22 pre-IPO price. And, as Yeung points out, for the company to justify its current valuation, it will need additional products that do not yet exist.
Plus, investors may be in for a rude awakening when Array exits its lockup period in April 2021. As Will Ashworth points out, one of the company’s largest stockholders — Oaktree Capital (NYSE:OAK.PB) — would be well advised to cash out:
“Post-IPO, it owns 43.3 million shares that it must hold until mid-April 2021. Those are currently worth $1.64 billion based on a $37.82 share price. Assuming this share price in six months, Oaktree will have total net proceeds of $2.1 billion from a $482 million investment, a return of 600%.”
Is The Solar Rush Coming?
As I write this, it appears likely that Joe Biden will be elected the next President of the United States. How does that affect solar?
It may seem obvious, but Biden has made it no secret that renewable energy will be a focus of his administration. And that could lead to a big rush on solar stocks.
So that would mean now is the time to jump on Array Technologies stock, right? Well, maybe not. Knowing investors in the stock have ignored valuation for much of the year, it’s hard for me to jump on the train on campaign promises alone.
What Will the Economic Recovery Look Like?
I mentioned earlier that renewable energy stocks in solar and wind grew, even while being largely ignored by the Trump administration. One reason for that growth is the strength of the underlying economy.
Regardless of which candidate wins the election, we are heading into an uncertain economic time. And with community spread of the novel coronavirus flaring up throughout the nation, there is a growing drum beat for — at the very least — targeted lockdowns. Positions change, but Biden has expressed agreement with this plan.
On top of that possibility, even when we do have a widely available vaccine there will be many businesses that have vanished forever. Plus, the nature of any company’s workforce is likely to change significantly, given these economic ripples.
All that in mind, I’m not sure that getting into Array Technologies stock — which already has some unsure footing — is the best move.
You Can Wait on Array
Renewable energy will be a theme of the next decade — that much is for sure. Solar and wind have already been dispelling the notion that they are not cost-effective energy sources. That may tempt you to buy Array Technologies stock as a long-term play on the solar sector.
But I advise caution. The stock looks overbought and its product will be facing evenly priced competition. Array also doesn’t appear to have anything in its pipeline to justify the current valuation. Finally, the economy may not be conducive to growth, even with a potentially favorable political climate.
I’m an optimist by nature and I hope for the best. However, I’m preparing my finances for the worst, including my portfolio. I’m not sure that solar can fit in with that.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.