Long term, I like Array Technologies (NASDAQ:ARRY). The solar supplier has a massive opportunity as alternative energy continues to take market share. But short term, I’m not quite sold on Array Technologies stock.
Again, there’s a lot to like in the long term between market growth and Array’s products. But a huge run since the initial public offering earlier this month raises valuation concerns. And the ARRY chart looks a bit dicey at the moment.
Some investors might want to buy now and ride out near-term volatility. I wouldn’t blame them for doing so. But I do think patience is advised at the moment. Array Technologies stock is intriguing now, but it would be downright attractive at a lower price.
The Array Business Model
Array develops what are known as “trackers” for solar installations. Trackers are integrated systems of supports, motors, gearboxes and electronics that move solar panels over the course of the day.
Trackers are more attractive than the fixed-tilt alternative for a number of reasons. Solar panels can follow the movement of the sun, adding to their energy generation capabilities. That, in turn, lowers the effective cost of the solar field as a whole.
Array is far from the only company that manufactures trackers. But it claims to be the best.
Array trackers use a single motor, whereas rival products use several. The single-motor design leaves fewer points of failure, while also reducing installation and maintenance expense. Given that the solar industry is trying to match the prices of coal- and natural gas–fired plants, lower cost is a big edge. Array’s single-motor technology is patent-protected, meaning rivals can’t roll out similar alternatives.
All told, this seems like an attractive business in an attractive industry. According to figures cited in the IPO prospectus, solar installations grew at a 20% annualized rate between 2014 and 2019. The market should grow at a mid-teens clip going forward.
The combination of a larger market and increasing share of that market has underpinned many of the big winners of recent years. Array Technologies looks set to capitalize on exactly that combination.
Valuation Concerns for Array Technologies Stock
Particularly for stocks with the potential to benefit from megatrends like solar, I don’t usually cite valuation as a reason to stay on the sidelines. In recent years, investors who have tried to buy growth cheap have often either missed out on big gains or chased stories that simply weren’t as attractive as bulls believed.
But Array Technologies stock does have some concerns in the early going. Array originally aimed to price its IPO in the $19 to $21 range before the stock opened at $22. The stock promptly rose 66% in its first day of trading, and even with a recent pullback has moved slightly higher.
The rally gives Array a nearly $5 billion market capitalization, just under five times its sales over the past 12 months (ending June 30). That revenue multiple doesn’t seem that high in this market — but this of course is not a software stock. Gross margins in the first half of 2020 (again, per figures from the prospectus) were just 25.4%.
There’s another factor to consider. Array didn’t go public solely to raise capital. Most of the shares sold in the IPO, in fact, were owned by Oaktree Capital Group, LLC (NYSE:OAK), a well-respected investment firm that backed Array when it was private.
Oaktree knows the Array business better than anyone. It was willing to sell Array Technologies stock at $22. To be sure, private equity exits aren’t done with a direct eye on valuation, but even considering that, buyers now are paying a price 70% higher than Oaktree was willing to sell at. That’s worth considering.
Hoping for a Lower Price
There are some technical worries as well. The ARRY chart suddenly looks a bit dicey, as the stock has retreated in recent sessions. Post-IPO trading usually has a great deal of volatility, and once the initial pop fades the reversal can last for quite a while. It wouldn’t be stunning to see Array Technologies stock keep heading in the wrong direction, providing a better entry point.
The broader mechanics of post-IPO trading can play a role as well. So-called lock-up provisions keep insiders from selling for 180 days after the IPO. As the lock-up expiration approaches, volatility usually picks up. Traders know that employees and private-market shareholders might be looking to sell — and to front-run those trades.
Lock-ups don’t always lead to a plunging, or even falling, share price. But the simple expansion of the float — the number of shares freely traded in the market — adds supply. Theoretically, steady demand and higher supply should lead to a lower price (though, again, it doesn’t always play out that way).
On the whole, then, there are reasons to stay patient with ARRY stock. The issue isn’t necessarily the long-term opportunity, which is obviously attractive. It’s the path to get to that opportunity. Somewhere along that path, I firmly believe investors will be able to pay less than $38 per share — and maybe quite a bit less.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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