Solar Stocks are Way Too Hot Right Now, but Array Stock Is Compelling

It’s been a great year for initial public offerings (IPO). Array Technologies (NASDAQ:ARRY) recently joined the big list of 2020 IPO winners. The company IPOed just last month at $22 per share. Array stock opened trading at $32, and now, just a month later, is already up to $40.

Solar energy panels are arranged in a green field under a sunny sky.

Source: Diyana Dimitrova / Shutterstock.com

No doubt, some of this enthusiasm is due to the broader surge in solar stocks. The presidential election has unleashed the bulls for the green energy stocks as a whole.

However, Array has much more going for it than just being another solar stock in a hot sector. In fact, it brings something quite novel to the mix.

Array Technologies is fundamentally a different business than most of the other listed solar companies. Generally, we’ve seen two primary types of solar firms go public.

You have companies that make solar panels, such as First Solar (NASDAQ:FSLR) and companies that install them commercially, such as Sunrun (NASDAQ:RUN).

A Closer Look at Array Stock

However, Array isn’t doing either of those. Rather, Array makes products that improve the efficiency of solar panels. Array has been in the business for thirty years already, and thus has developed specific domain expertise. I

ts products, such as the DuraTrack HZ, allow a solar operator to have their panels automatically adjust their angle throughout the day to capture more of the sun’s power.

Additionally, the DuraTrack is able to intelligently react to things such as wind and weather to maximize the energy output of a given solar installation. There’s an increasing focus on the land and natural resource usage around installing new solar projects.

Thus, it should be a high priority to get more efficiency out of existing panels and land devoted to solar. Array is there to help make solar more competitive and better for the environment.

Strongly Improving Operating Results

Array is currently growing at a rate that would make even the average software company blush. From full-year 2018 to 2019, Array’s revenues more than doubled, surging from $291 million to $648 million.

The company just released its full-year 2020 guidance, which sees revenues further advancing to around $850 million. Admittedly, sales growth has significantly slowed down in Q3 and Q4, thanks to the pandemic, however it’s still a big boost from where the company was last year.

Impressively, Array is making a ton of money on these sales too; it isn’t just growing for the sake of a fast growth rate. The company’s gross margin is up to 24%, which is another three percent bump from last year. That’s not a bad margin at all on this sort of product.

Overall, Array anticipates EBITDA of about $160 million for the year, and earnings per share of around 84 cents. That makes for a sub-50 P/E ratio for Array stock, even with its hyper-charged growth rate. As I said before, Array is not your average solar company. Right out of the IPO, Array is already more profitable than most of its peers.

Array Stock Verdict

I’m of two minds when it comes to Array. On the one hand, I’m bearish on solar shares in general. The recent presidential election looks like a classic buy the rumor, sell the news situation.

With the government likely to be divided going forward, there won’t be much that President Biden can do in terms of bolstering the solar industry even if it were one of his top priorities.

Yet most solar stocks have already doubled, and some are up a lot more than that, merely on expectations of more favorable government policy. That’s a really flimsy support to base a full bullish thesis on. And for many solar companies, there simply isn’t much of anything there in terms of profits or cash flows to back up the now bloated share prices.

As it comes to Array, however, this is a much better business than its peers. Array already moved strongly into profitable territory last year.

Given its growth rate, it should do even better going forward. Thus, while Array stock is trading at a high valuation, particularly since the stock has doubled already off the IPO, there is no doubt a fundamental case to support this optimism.

So while I’m negative on solar as a sector, if you want to own one stock in the group, Array is a good choice for that role. Just be prepared for short-term volatility, as traders have baked in a lot of expectations out of the new government already.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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